DOD Officials Defend DCAA
DCAA has received perhaps more than its fair share of criticism over the past couple of years. We have even doled out some of the criticism ourselves. In November, 2009, Patrick Fitzgerald replaced
April Stephenson as Director of the Defense Contract Audit Agency, and
many of us hoped the new leadership would guide the agency away from the
problems caused by its truculent attitude. But Mr. Fitzgerald has yet
to create any substantive reforms, and recent audit guidance
gives little—if any—reason for optimism that DCAA is going to rejoin
the ranks of the Defense acquisition corps as a valued (and value-added)
member.
Various commenters have questioned the audit agency’s commitment to change. In this article,
we reported on a blog post from POGO in which the author thought the
auditors were playing too nice with the Defense Contract Management
Agency (DCMA). He wrote—
But
on the other hand—and I think this is probably the case—this memo
demonstrates another instance where DCAA's independent audit findings
may be undermined. The memo states that auditors and contracting
officers should work together to ‘resolve’ audit issues and emphasized
that even when differences occur, DCMA and DCAA should strive to work
the issues within the respective organizations. This memo gives the
impression that audit findings are something to be ‘resolved’ between
the two organizations rather than audit findings to be acted upon by the
contracting officer. And to the degree that this is the case, or that
this memo confuses the independent role of DCAA, the Director of DCAA
should consider withdrawing the memo.
In another article, we reported that the same gadfly group (POGO) had sent a letter to influential senators in March, 2010, telling them that—
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. More importantly, we think that it would be
naïve to assume that removing April Stephenson from DCAA solves the
systemic problems at DCAA.
Perhaps becoming a bit impatient with the lack of substantive reform, Congress weighed-in, proposing legislation (H.R. 5013) that would mandate reforms to the agency—reforms that the agency seems reluctant to make.
The foregoing provides some context for a “viewpoint” posted
on FederalTimes.com, written by Robert Hale (Undersecretary of Defense,
Comptroller) and Mr. Fitzgerald. The piece, entitled “DCAA Working to
Improve Audit Quality, Management,” recapped the progress made in
reforming the admittedly “tarnished” audit agency. The progressive
actions that have been taken are nothing new to anybody who reads our
articles and, in fact, tend to mask the agency’s continued failure to
address its withdrawal from—and, indeed, active attempts to sabotage—the
Defense acquisition system in the name of “independence” and compliance
with generally accepted government auditing standards.
Suffice to say, we were not impressed.
Nor were the few commenters who posted their thoughts. One comment, posted on the POGO site, had this to say—
These
must be the only two people in DoD that think DCAA is on the right
track! The audits need to be timely, e.g. issued before the need no
longer exists, to be meaningful. Please if there is anyone out there
that is receiving timely reports fro DCAA, please post the info here so
we can share in their glory. I suggest Mr.Hale and Mr. Fizgerald share
some success stories concerning timely reports, I bet there aren't many
to share. Just how many reports has DCAA issued this FY in total? I hear
auditors spend most of there time waiting for their reports to be
issued. None of the auditors I've spoken with consider themsevles busy,
most would wlecome more work if the resulting reports would be issued.
We deplore the grammar and spelling, yet sympathize with the sentiments expressed.
Departing Air Force General Calls for Fundamental Changes to DOD Acquisition Processes on His Way Out
We’re
sure it’s merely coincidence, but on his last day of active duty with
the USAF, Lt. General Dave Deptula spoke his mind about the need for
fundamental changes to the DOD’s acquisition processes. This article
from the Online Defense and Acquisition Journal blog (“DoD Buzz”)
reports on General Deptula’s last official press conference as an Air
Force officer, in which he talked about his “personal views” on the need
to get new weapon systems developed, tested, and fielded faster.
According to the article—
During
a recent meeting with his staff during a meeting to discuss Remotely
Piloted Vehicle capabilities, Deptula asked them when a program might
make it to Initial Operational Capability if they started work on right
away, they told him it would take until 2020 ….
What’s the problem? According to the General Deptula—
The
current Air Force acquisition system was born of the industrial age of
warfare, not the current age. Instead of relying on that system, Deptula
pointed to the Liberty program and the Big Safari office as examples
the service ‘should adopt as the norm rather than the exception.’ Big
Safari is an independent office that has helped develop Air Force RPVs
since the early 1960s.
The DoD Buzz article reports that General Deptula was even more pointed in his criticism of DOD acquisition processes.
Deptula
pointed to one of the most complex and disliked parts of the
acquisition process — the Joint Capabilities Integration Development
System (JCIDS) — and gently ridiculed it, noting that ‘Al Qaeda doesn’t
have a JCIDS process.’
What is JCIDS? According to the DOD, the JCIDS process—
…
was created to support the statutory responsibility of the JROC to
validate joint warfighting requirements. JCIDS is also a key supporting
process for DOD acquisition and Planning, Programming, Budgeting, and
Execution (PPBE) processes. The primary objective of the JCIDS process
is to ensure the capabilities required by the joint warfighter are
identified with their associated operational performance criteria in
order to successfully execute the missions assigned. This is done
through an open process that provides the JROC the information they need
to make decisions on required capabilities. The JCIDS process supports
the acquisition process by identifying and assessing capability needs
and associated performance criteria to be used as a basis for acquiring
the right capabilities, including the right systems. These capability
needs then serve as the basis for the development and production of
systems to fill those needs. Additionally, it provides the PPBE process
with affordability advice by assessing the development and production
lifecycle cost.
Did you get all that? If not, here’s a link to the office JCIDS Manual. And here’s a link to a Wikipedia article that uses more understandable terminology.
General
Deptula is not the first military leader to call for reform to an
overly complex and lengthy process. In May 2010, National Defense
magazine carried an article entitled, “Without Radical Change, Many More
Defense Programs Will End Up Like JSF,” written by Sandra Erwin. Ms.
Erwin explored “how to stop more programs from ending up like JSF,” with
its “soaring costs and schedule slips.”
We’ve written about the F-35 Joint Strike Fighter program before, notably here and here.
But Ms. Erwin was not writing about the F-35; she was writing about the
“fatal flaw” in the Defense acquisition system that needs to be fixed.
As she wrote—
The
Defense Department and Congress this past year unleashed an avalanche
of new reforms … But all these attempts at overhauling a broken system
continue to conveniently ignore a fatal flaw in the weapons acquisition
process: It is hopelessly slow and unresponsive to the military’s
rapidly changing needs.
Because
it takes years or even decades to bring a weapon system to fruition, it
gets redesigned so much that invariably it results in sticker shock.
Every change, no matter how small, runs up a huge tab. When a program
spans 10 to 12 years, and hundreds of modifications are made … it is no
surprise that costs spin out of control.
It is no surprise we agree with Ms. Erwin’s thoughts, and have written as much (for example, this article
exploring why DOD’s Missile Defense Agency can’t manage its programs.)
But the problem isn’t necessary change control; the problem is the
process that embeds a nearly unmanageable volume of changes into its
very fabric. The problem is a DOD JCIDS process that “deliberately
emphasizes analysis and risk avoidance at the expense of speed”—to quote
Colonel Timothy Chyma (as Ms. Erwin did). Ms. Erwin also quotes an
anonymous “senior Air Force official” as saying, “We’ll be dealing with
the same issues as long as we have the same JCIDS process.”
We
are in the midst of seeing enormous amounts of energy poured into
addressing “efficiency” and “affordability” initiatives by the Pentagon
and its contractor industrial base. (See one of our many articles on
that topic here.) We urge the Pentagon to
take a long, hard look at its JCIDS process—because if that process is
significantly reformed, then it will increase both Pentagon decision-making efficiency and weapon system affordability.
Two birds with one stone. We like that kind of approach.
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Contractors Pay Penalties for Kickbacks
We’ve
written about kickbacks before. We did a quick search of the site’s news archive, and
found eight articles dealing with kickbacks, including this article
that discusses (in some depth) the FAR prohibition on accepting
kickbacks (found at § 3.502), in the context of allegations that
employees of KBR accepted “unlawful kickbacks in the form of meals, drinks, tickets to sports events and golf outings” as well as this one,
discussing EMC’s $87.5 million False Claims Act settlement, related to
inaccurate disclosure of commercial pricing practices and an “illegal
kickback scheme” related to its contract with the General Services
Administration (GSA). We’ve got kickbacks covered.
Another
large, well-known company was recently in the news, related to a
settlement with the Department of Justice over practices related to its
GSA schedule contracts. That company was Hewlett-Packard, one of the
largest (if not in fact the single largest) technology company in the
America. HP, who coincidentally saw its CEO resign for inappropriate
conduct in the same week, reportedly settled with DOJ for a figure in
the $47 - $50 million range.
Details of the allegations and settlement are sketchy. Perhaps the best report we have been able to find is here, at the Financial Times. According to the FT story—
The
justice department eventually intervened in a False Claims Act case
brought by Normal Rille and Neal Roberts in federal court in Arkansas.
Their suit said that HP paid a list of systems integrators millions of
dollars in ‘influencer fees’ if they successfully put HP products
forward in government deals. The integrators had an obligation to act in
the government’s best interest but did not, the suit said.
The
number one computer maker also gave ‘New Business Opportunity’ payments
when it was included as a subcontractor on government contracts. Those
payments were not intended to be passed on to the government agency, and
the same products could have been obtained with volume pricing deals
that would have reduced the payments, according to the suit.
Both types of payments met the definition of kickbacks in federal laws designed to stop overcharging, the suit said.
A dozen other technology companies were implicated in the case as well.
According
to the FT story, HP denies the allegations, but believed that settling
with the DOJ was in the best interests of its shareholders. (It often
is.) Nonetheless, HP took a $0.02/share hit to earnings in its Q3
results.
In completely unrelated news, here’s an article
from the Tri-Cities area near Hanford, Washington—home of one of the
nation’s largest active nuclear waste clean-up efforts. According to
the article, Greg Detloff has been charged with 27 counts of wire fraud,
one count of conspiracy, and one count of witness tampering. The
article states that the wire fraud counts are related to “federal credit
card fraud.” Each of the 29 charges is punishable by 20 years in
prison and a $250,000 fine. So we’re talking about 580 years in prison and $5 million in fines, should Mr. Detloff be found guilty. That could set one’s vacation plans back quite a bit.
Mr. Detloff has pleaded not guilty to the charges. But what did he do to merit such attention from the Feds?
The
article states that, while employed as a material coordinator by two
Hanford contractors (Fluor Hanford and CH2M Hill Hanford Group), Mr.
Detloff is alleged to have conspired with Martin Perez, who was employed
as a salesman by Kennewick Industrial and Electrical Supply (KIE).
They (allegedly) agreed that Detloff, acting for the contractor(s),
would purchase “supplies and materials” from KIE—if KIE agreed to order
those supplies from Detloff Industries—which was a company owned by his
wife and operated out of the family home.
The article reports that “Perez
received a 3.5 percent commission on orders placed by Detloff, and the
Detloffs received their net profit from all materials and supplies sold
by Detloff Industries through KIE.” Even though Detloff Industries was
an approved Hanford supplier, and even though there have been no
allegations that prices paid by the contractors (and ultimately the
Department of Energy) were higher than they otherwise would have been,
the relationship (allegedly) created a clear conflict of interest.
According
to the article, “The case against Detloff and Perez was one of three
cases alleging fraud in Hanford purchases filed this spring in federal
court. Defendants have pleaded innocent and the first case could go to
trial as soon as September.”
This article
from May, 2010, provides some details on the other alleged fraudsters.
First, it notes that Detloff (allegedly) used a corporate credit card
to make the purchases from KIE, so that’s where the federal credit card
fraud charges come from. The article also reports that—
In
a second indictment, federal prosecutors filed wire fraud charges
against Suzie Zuniga, who held a job similar to Detloff’s while working
for Fluor Hanford. The same
indictment includes charges against Tommy L. Honeycutt Jr., a former
pipe fitter for a Hanford company; and Pedro Alvarado Jr., a former driver.
The indictment said that between 2004 and 2008, Zuniga used a company
card issued to her by Fluor Hanford to authorize purchases that totaled
almost $560,000. It alleges
Zuniga, Honeycutt and Alvarado prepared phony invoices for purchases of
supplies or materials from a number of vendors approved for Hanford’s
Plutonium Finishing Plant.
In addition, the article reports that—
…
federal prosecutors filed fraud charges against … Paul F. Kempf and his
wife, Anita M. Gust, alleging the couple bilked two Hanford contractors
out of roughly $500,000 through unauthorized purchases. The charges
allege Kempf, a former manager at Fluor Hanford and then at CH2M Hill
Hanford, and Gust used phony product orders to obtain personal items or
cover personal expenses from 2001 to 2005.
These
stories are not necessarily related in an obvious way. HP allegedly
paid kickbacks in order to have its products recommended for Government
purchase, and the Hanford miscreants allegedly participated in more
prosaic, blue-collar types of purchasing fraud. Yet all the stories
point to a need to establish internal controls
over the acquisition function—whether it be sell-side “business
development” or buy-side “purchasing/supply chain management”. And once
those controls are in place, an independent compliance function needs
to periodically probe for violations.
Post-Script
After
we sent our article to press (well, to the webmaster) details emerged
regarding the transgressions that led to the resignation of
Hewlett-Packard’s CEO, Mr. Mark Hurd. Although we noted Mr. Hurd’s
resignation in passing—saying “HP, who coincidentally saw its CEO
resign for inappropriate conduct in the same week, reportedly settled
with DOJ for a figure in the $47 - $50 million range”—it turns out that
the transgressions may not have been so coincidental after all. We were
writing about (alleged) procurement fraud at the Hanford nuclear waste
site, which involved (among other things) fraudulent purchase orders,
expense reports, and credit card activities. Turns out Mr. Hurd would
fit right in with our “blue-collar” (alleged) miscreants.
According to this article
(one of many we could have linked to), Mr. Hurd was exonerated of the
sexual harassment charges of which he was accused. But the
investigation revealed several instances of falsified expense reports
regarding his “management consultant.” We’ll let the Wall Street
Journal take it from here—
Mr.
Hurd was forced to resign last week, ostensibly for filing false
expense reports amounting to about $20,000. H-P deemed this sum ‘not
material,’ which is beside the point. Anything related to Mr. Hurd's
departure is plainly material, since on Monday the news shaved $8.7
billion off H-P's market value. … Apart from the expense-report issues,
exactly what services was Ms. Fisher performing for H-P? The company
said she was an outside marketing consultant, and its general counsel
indicated she may not have provided all the services she contracted for.
But what were those services, and what were Ms. Fisher's
qualifications? Her resume doesn't include an M.B.A., to put it mildly,
although it appears she did work in real estate and in sales for Xerox
in addition to her movie work and appearance on NBC's ‘Age of Love.’
Supposedly she was a glorified hostess at H-P sales events, making sure
big clients got face time with Mr. Hurd. Who hired her and why, based on
what qualifications?
Nice.
Notice that what’s not said by the WSJ author in the foregoing speaks volumes about what may have really been going on. Just to
remind readers, we’ve covered the use (and misuse) of consultants before. And we’ve discussed “tone at the top” before, as well.
TANKER UPDATE: Russians Submit Late Bid and a Protest
When last we wrote
about the problem-plagued USAF next-generation aerial refueling tanker
acquisition, we told you that Ukrainian aircraft manufacturer Antonov
would be submitting a bid in partnership with U.S. Aerospace. Most
observers thought little of the “dark-horse” team’s prospects.
Nonetheless, the Antonov/U.S. Aerospace team submitted a bid … and it
arrived five minutes too late. As this article reported—
According
to an industry executive, a messenger carrying a bid from U.S.
Aerospace arrived at the Wright-Patterson gate at about 1:30 p.m., 30
minutes before the deadline. ‘Air Force personnel intentionally denied
the messenger entry to the base’ and later provided ‘incorrect
directions,’ and forced the messenger to wait when he got turned around.
The proposal was marked 2:05 p.m., but this executive says that the bid
was under Air Force control prior to that time
Both
EADS and Boeing submitted their competing bids on time. Interestingly,
the article noted that each of the other bidders’ proposals were “more
than 8,000 pages in length.”
Because
the Antonov bid was late, it was rejected by the US Air Force. The
article quotes the Pentagon’s press secretary as saying, ““The proposal
was late and by law we are not allowed to consider it. We are
considering two proposals and U.S. Aerospace is not one of those being
considered.” Moreover, the spokesperson said—
Those
deadlines count. They mean something. They are there for a reason and
any professional contractor knows that. This is a $30-40 billion bid.
This is not a high school homework assignment. Deadlines count here.
The
Antonov/U.S. Aerospace team promptly filed a protest on August 2, 2010,
with the Government Accountability Office (GAO). They claimed the Air
Force’s actions were unreasonable and that personnel at Wright
Patterson AFB discriminated against their bid. Do they have a case?
Let’s look.
FAR 15.208 has this to say about the treatment of late proposals –
(a)
Offerors are responsible for submitting proposals, and any revisions,
and modifications, so as to reach the Government office designated in
the solicitation by the time specified in the solicitation. …
(b)(1)
Any proposal, modification, or revision, that is received at the
designated Government office after the exact time specified for receipt
of proposals is ‘late’ and will not be considered unless it is received
before award is made, the contracting officer determines that accepting
the late proposal would not unduly delay the acquisition; and—
(i)
If it was transmitted through an electronic commerce method authorized
by the solicitation, it was received at the initial point of entry to
the Government infrastructure not later than 5:00 p.m. one working day prior to the date specified for receipt of proposals; or
(ii)
There is acceptable evidence to establish that it was received at the
Government installation designated for receipt of proposals and was
under the Government’s control prior to the time set for receipt of
proposals; or
(iii) It was the only proposal received.
(2)
However, a late modification of an otherwise successful proposal, that
makes its terms more favorable to the Government, will be considered at
any time it is received and may be accepted.
(c)
Acceptable evidence to establish the time of receipt at the Government
installation includes the time/date stamp of that installation on the
proposal wrapper, other documentary evidence of receipt maintained by
the installation, or oral testimony or statements of Government
personnel.
So, to
prevail in its protest the Antonov/U.S. Aerospace team must prove that
its proposal was received “at the Government installation designated for
receipt of proposals and was under the Government’s control” before the
due date of 2:00 PM. Otherwise, its protest likely will not be
sustained.
But
regardless of the protest outcome, it strikes us as disadvantageous to
the Government to ignore a proposal received a mere 5 minutes after the
deadline. Certainly, nobody has hinted that there was some competitive
advantage that accrued to the late bid in that five minute period.
Given the troubled history of this procurement, we would expect some
flexibility to be shown where the other bidders would not be prejudiced
and the taxpayers might get their tankers for less money.
On
the other hand, such tardiness does reek of amateur hour, doesn’t it?
How does the Antonov/U.S. Aerospace team expect to build 100 aerial
tankers on time and on budget, when it can’t even get its proposal to
the USAF evaluators on time?
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