Travel Rules Cause Problems for Everybody—Even DOD!
One of the largest drivers of
unallowable costs is business-related travel expenses. The Cost
Principle at FAR 31.205-46
requires (among other things) that contractors can only claim travel
expenses that do not exceed the ceilings imposed by the Federal Travel Regulations, Joint Travel Regulations, and/or the Standardized Regulations, depending
on which set of travel regulations is applicable to the trip.
Importantly, these regulations are designed to regulate the travel of
employees of the Federal government—and not contractor employees.
Consequently, only certain parts of those travel regulations apply to
contractor employees. It’s a difficult Cost Principle to navigate
through, made more difficult by references to the various sets of
Federal regulations noted above.
Compliance with the FAR Cost Principle is
difficult, requires personnel resources, and costs the contractor
additional expense. In addition to the back-office employees necessary
to assure compliance and support Government audits of compliance, there
is the not insignificant additional cost associated with requiring
employees to provide more detail than they would if they were not
traveling on government-related business, and to provide more
explanations and documentation than they otherwise would. We’ve
suspected for a while that compliance with this particular Cost
Principle may actually cost the Federal government more than it “saves”
in unallowable contractor costs—but of course we have no evidence to
support our suspicion.
Recently, the
travel Cost Principle was revised
to narrow the range of allowable airfare costs a contractor can incur.
We didn’t like the revision, and told you why at the time. We
predicted that Government auditors would misinterpret the rule and cause
problems. And our prediction was proven correct a couple of months
later, when DCAA published its
audit guidance telling auditors how to audit for compliance with the
revised rule. A complex Cost Principle was made even more complex by a
poorly drafted rule revision, and the situation was exacerbated by
DCAA’s flawed interpretation of the rule.
So it is with a bit (or perhaps a bit more than
that) of Schadenfreude that we
note this article in
FederalTimes.com, which reports that “Pentagon officials” have asked
Congress for a relaxation to the byzantine
set of rules governing travel on behalf of the Department of
Defense. The reason for the request is that the current regulatory
regime is too complex, according to officials of the Defense
Transformation Agency. According to the article, the Defense Department
“has defined 76 types of trips that its employees might take,” making
programming the Defense Travel System software too difficult. The
project to automate the Defense Travel System has been an on-going
project for more than 15 years.
The FederalTimes.com article quoted Mr. David
Fisher as saying, “We'd have to spend millions and millions of dollars
to get it right. We'd like to be able to continue that investment in a
simpler world." The article reported that Fisher and his co-worker, Ms.
Pam Mitchell, “asked for the subcommittee's help in navigating about
2,000 pages of sometimes contradictory rules and regulations that govern
Defense travel. Reforming the system will require legislative action.”
Contractors would like to ask
Congress to undertake similar reform efforts. While it is true that
certain travel costs might be subject to abuse, the majority of such
costs are “commercial” in nature and pricing is largely governed by
market forces. It’s time for the travel rules to be simplified, for
everybody.
Proposed DFARS Rule on Organizational Conflicts of Interest
We’ve
discussed the Weapons System Acquisition Reform Act of 2009 (WSARA) several times. (See, for
example, this article or this one here.) WSARA—aka Public Law 111-23—aimed to “improve
the organization and procedures of the Department of Defense for the
acquisition of major weapon systems, and for other purposes.”
Section 207 of WSARA required the DOD to “to revise
the DFARS to provide uniform guidance and tighten existing requirements
for organizational conflicts of interest (OCIs) by contractors in major
defense acquisition programs.” Accordingly, on April 22, 2010, the DAR
Council published a proposed revision to the Defense Federal
Acquisition Regulation Supplement (DFARS) in the Federal Register. The
proposed rule can be found here.
According to the proposed rule—
The law
sets out situations that must be addressed and allows DoD to establish
such limited exceptions as are necessary to ensure that DoD has
continued access to advice on systems architecture and systems
engineering matters from highly qualified contractors, while ensuring
that such advice comes from sources that are objective and unbiased.
In
developing regulatory language, DoD is directed to consider the
recommendation presented by the Panel on Contracting Integrity. ... DoD
must also consider any findings and recommendations of the Administrator
of the Office of Federal Procurement Policy (OFPP) and the Director of
the Office of Government Ethics (OGE) pursuant to section 841(b) of the
Duncan Hunter National Defense Authorization Act (NDAA) for Fiscal Year
(FY) 2009 (Pub. L. 110-417). Section 841(b) of the NDAA for FY 2009
required review by OFPP, in consultation with OGE, of FAR coverage of
OCIs.
So, basically, there are a lot of
stakeholders with input into the rulemaking process. But the public is
also a stakeholder, as the proposed rule noted—
A public
meeting was held on December 8, 2009 … to provide opportunity for
dialogue on the possible impact on DoD contracting of the section 207
requirements relating to OCIs. In the formation of this proposed rule,
DoD considered the comments provided at the public meeting, as well as
other unsolicited comments received from the public. Various presenters
at the public meeting (1) Expressed a desire for policy and regulation
to emphasize the importance of using mitigation strategies to address
OCIs, (2) sought a more consistent approach within the Government to
resolve OCIs, and (3) voiced a strong interest in ensuring any rule is
published for comment prior to taking effect.
A highlight of the proposed rule—which you should
all review at the link provided above—is that it updates the acquisition
regulations to reflect recent court cases. Savvy readers will
understand that the regulations are just words, and that the words are
given meaning and come alive via interpretations provided by the
Courts. So it is, with respect to OCIs, that the Government
Accountability Office (GAO) and the U.S. Court of Federal Claims (CoFC)
have interpreted various aspects of OCI rules in their bid protest
decisions. The DAR Council asserted that the proposed DFARS language
takes the recent case law into consideration.
Cases cited in the promulgating comments included—
- Aetna Government Health Plans
(B-254397, July 27, 1995)
- ICF Inc., (B-241372, February 6, 1991)
- Overlook Systems Technologies,
(B-298099.4, B-298099.5, November 28, 2006)
The proposed rule—including the all-important
promulgating comments—was quite long and complex. Among other things, it
proposed to add a new DFARS subpart under Improper Business Practices
and Personal Conflicts of Interest—Subpart 203.12 (Organizational
Conflicts of Interest)—that covered such areas as: Types of OCIs,
Contracting Officer responsibilities, Identification and Resolution of
OCIs, Waivers, and Solicitation Provisions/Contract Clauses to be used.
As always, the public may submit comments to www.regulations.gov by following the instructions found at the
beginning of the proposed rule.
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Congress Wants to Fix DCAA
The House Armed
Services Committee (HASC) Panel on Defense Acquisition Reform published its final report recently.
The final report was not much different from the interim report we told you about. As it concerned
DCAA, the HASC Panel recommended that “The Department [of Defense]
should consider shifting the responsibility for certification of
contractor business systems to independent teams within or outside of
DCAA and DCAA should allocate its audit resources on the basis of risk.”
It
should not be a surprise that recently introduced legislation puts
forward some of the HASC Panel’s recommendations. It should not be a
surprise, but it is—mostly because there have been so many panels and
commissions throughout the years, with so many recommendations, that
have not made it into legislation. Yet H.R.
5013 – the proposed “Implementing Management for Performance and
Related Reforms to Obtain Value in Every Acquisition Act of 2010,” does
in fact address many (if not all) of the Panel’s recommendations.
More to our interests, H.R. 5013 proposes to amend
Title 10 of the United States Code at § 131 as follows—
Sec.
2222a. Criteria for business system reviews
(a) Criteria for Business System Reviews- The
Secretary of Defense shall ensure that any contractor business system
review carried out by a military department, a Defense Agency, or a
Department of Defense Field Activity--
(1) complies with generally
accepted government auditing standards issued by the Comptroller
General;
(2) is
performed by an audit team that does not engage in any other official
activity (audit-related or otherwise) involving the contractor
concerned;
(3) is
performed in a time and manner consistent with a documented assessment
of the risk to the Federal Government; and
(4) involves testing on a
representative sample of transactions sufficient to fully examine the
integrity of the contractor business system concerned.
(b) Contractor Business System
Review Defined- In this section, the term `contractor business system
review' means an audit of policies, procedures, and internal controls
relating to accounting and management systems of a contractor.'.
(c) Contract Audit Guidance- Not
later than 180 days after the date of the enactment of this Act, the
Secretary of Defense shall issue guidance relating to contract audits
carried out by a military department, a defense agency, or a Department
of Defense field activity that are not contractor business system
reviews, as described under section 2222a of title 10, United States
Code, that--
(1)
requires that such audits comply with generally accepted government
auditing standards issued by the Comptroller General and are performed
in a time and manner consistent with a documented assessment of risk to
the Federal Government;
(2) establishes guidelines for discussions of the
scope of the audit with the contractor concerned that ensure that such
scope is not improperly influenced by the contractor;
(3) provides for withholding of
contract payments when necessary to compel the submission of
documentation from the contractor; and
(4) requires that the results of
contract audits performed on behalf of an agency of the Department of
Defense be shared with other Federal agencies upon request, without
reimbursement.
We have, in the past, occasionally complained (or whined?) about
PWACs—Persons Without A Clue—who propose legislation or regulation
without thinking through the consequences. Looking over H.R. 5012,
there is much to applaud. However, with respect to the provision noted
above, we are less sanguine. Our objections to the proposed legislation
are as follows—
- The DAR Council is already in the midst of the rulemaking process regarding audit and administration of
contractor “business systems.” We’ve weighed-in on the proposed rule, ourselves. If
this legislation goes forward as-is, then the FAR Councils will need to
revise the rulemaking they’ve already done, and make substantive
changes to the regulations. This will create confusion in the
contracting community, not to mention being wasteful of government
resources.
- As we told Mr. Fitzgerald (Director, DCAA) back
in January of 2010, not all DCAA audits need to be subject to generally
accepted government auditing standards (GAGAS). In particular, audits
of contractor internal control systems seem like very good candidates
for not being subject to such standards. In general, we oppose Congress
telling DCAA which audits should (or should not) be subject to GAGAS.
Back off, Legislators!
- Moreover, legislating a requirement that DCAA should perform
sufficient transaction sample testing to support its opinion seems both
asinine and redundant. As if any of the Congress members could tell a
sufficient sample size from an insufficient one!
- We do like making DCAA perform its
audits timely, and we even support control system reviews being
performed by trained, specialized staff. (After all, the DCMA
purchasing system reviewers are trained, specialized staff.) However,
we wonder whether DCAA actually can implement the legislative mandate,
given its current lack of resources and management acumen.
It
would seem to make sense to allow DCAA time to get its house in order,
to keep well-intentioned outsiders from meddling in things of which they
have little or any first-hand knowledge. Unfortunately, it has been suggested that DCAA’s reform efforts
are merely window-dressing, and that the audit agency is resistant to
meaningful reform. Perhaps Mr. Fitzgerald has had sufficient time to
clean house, and it is now appropriate to “help” him along?
We
are not sure this is the right time to “help” DCAA fix itself. We are
not sure these are the right fixes. We are not sure Congress is the
right “home” for the fixes. And we’re not sure that DCAA reform efforts
should be undertaken without the input of the contractors who work
hand-in-hand with DCAA auditors, and feel the effects of changes to DCAA
audit guidance, every single day.
H.R. 5013 makes us
nervous ….
UPDATE: In a shocking display of bipartisanship, the House passed H.R. 5013 on April 28, 2010, 417 to 3.
Toward a Secure Supply Chain—A Rant for Your Amusement
Two
trends dominate our thinking about supply chain management—programs are
ever-more reliant on effective management of their supply chains, and
supply chains are ever-more global in scope. What this means is that
contractors are vulnerable.
They are vulnerable to execution problems caused by suppliers three or
four tiers deep in their supply chains—or even lower. They are
vulnerable to cost and schedule impacts from vendors of whom they’ve
never even heard, let alone run through a risk identification and
mitigation process. And the quality of their finished product is
dependent on suppliers located tiers deep and countries away. From
“specialty metals” to resisters and diodes, the supply chain is—for
better or worse—truly a global one.
Some companies and
members of Congress want to make the competition for design and
construction of the next generation U.S. Air Force’s aerial refueling
tanker to be about the country in which the prime contractor is headquartered. Regardless of whether an “American” or “European” company wins
the prime contract, it is a certainty that some portion of the tanker
will be built outside the borders of this country. Deal with it.
As
we reported in this article,
many major defense acquisition programs are dependent on rare earth
magnets produced in China. You have a problem with that? It’s called free-market capitalism, cupcake.
Free-market capitalism is what our country is supposed to be about.
Free-market
capitalism is what happens when companies close-down production in
locations with high labor costs or high insurance costs or high income
taxes, and move their production facilities and/or workforce down the
road a piece to where it’s cheaper to operate and the margins are
higher. If by “down the road” one means “across the ocean to a foreign
land” then so be it. You don’t like the results, then change the
business climate, sweetheart.
You got a problem with
loss of manufacturing capacity, loss of skilled jobs and industrial
capacity, loss of critical technologies, and/or loss of ability to
produce “American-made” defense weapons and programs? Then you better
turn the Titanic around, Einstein, ‘cause the Pentagon hit that
particular iceberg about 20 years ago.
In
the meantime, while you’re running for the wheelhouse and pleading with
the Captain to turn the ship around, we have work to do. We’ve got to
secure our supply chain.
Securing the supply
chain doesn’t mean to stop dealing with foreign suppliers. It doesn’t
mean building barriers that inhibit communication, visibility, and
establishment of long-term partnerships. It doesn’t mean adding a bunch
of labor or costs into the transactional hand-offs between buyer and
seller. It doesn’t mean getting the lawyers involved. We have some
thoughts toward what it does mean, but nobody has it down to a science
yet.
Frankly, the aerospace and defense industry is
behind the times. You want state of the art? You’ve got to look at the
Food and Drug Administration (FDA). They have been concerned with
securing the supply chain—particularly as that term applies to
prescription drugs, for many years. In January 2009, the FDA announced a “secure supply chain
pilot program” aimed at allowing the FDA to determine the “practicality”
of developing a secure supply chain program “to prevent the importation
of adulterated, misbranded, or unapproved drugs by allowing the agency
to focus its resources on imported drugs outside the program that may
pose such risks.”
Pentagon PEO’s, are
you listening? While the FDA is concerned with adulterated or
unapproved drugs, you need to be concerned about counterfeit parts and
components, or electronics designed to fail upon command. As a recent
article in the April 19, 2010 edition of Aviation
Week & Space Technology magazine reported, “It’s only a
matter of time, say experts … before a fake component in a major piece
of Pentagon equipment leads to catastrophe because the Pentagon lacks
the ability to track or identify the counterfeits.”
That
same article reported on a November 2009 study by the Commerce
Department, commissioned by the DOD that put the Pentagon on notice that
its supply chains were vulnerable to counterfeit parts. This article in the EETimes discussed
that report. The EETimes article reported—
The survey … revealed extensive
problems in the electronic industry supply chain and showed
counterfeiters are targeting discrete products as well as microcircuit
with ‘fake non-working parts’ or ‘working copies of the original
designs.’ Some counterfeit parts were also ‘new products re-marked as
higher grade product,’ the Bureau said, adding that many of the new
parts would work ‘but not at the desired level of functionality.’ ‘The
majority of counterfeit parts are being discovered because they are
returned as defective, exhibit poor performance, or have incorrect
markings or physical appearance,’ the Bureau said in a report. ‘A
significant number of counterfeit incidents were uncovered because the
customer suspected the parts were counterfeit.’ Counterfeiters are
lured by the easy profit they can make from pouring fake or substandard
products into the supply chain and also because it is often very easy to
introduce their counterfeit products into the system.
So
what can be done about this problem?
First, use of
technological enablers can help sort out the good parts from the bad
ones. Currently available technologies include:
- Radio Frequency Identification (RFID). RFID is wireless technology that
communicates part identification data by radio waves. Data is encoded
into a chip which is integrated with an antenna and packaged into a
finished tag. The encoded data is read with read/write devices,
commonly known as “readers” or “interrogators.”
- Electronic Product Codes (EPC) (aka Unique Item Identifier or UID in the defense industry). Each
mission critical part/component is assigned a unique identification
number in the supply chain.
But those solutions have
their own problems. For example, you don’t want a component
broadcasting its RFID to the world while installed on a stealthy B-2
bomber. An UID numbers can be faked. They are good first steps, but
are ultimately ineffective at securing the supply chain. There are some
other innovative technologies can and should be adapted to our needs,
including use of light-bending color and nanotechnology (“taggans”).
The
risks for the A&D industry sector are real. The risks demand a
serious and near-term response. Our goal should be to establish a
“product pedigree” for our supply chain through creating an unbreakable
chain of custody from first source through the various manufacturing and
fabrication and assembly and finishing steps. We need to be able to
follow our raw stock and piece parts and components and sub-assemblies
into final assembly and test, ideally by satellite monitoring. One the
product is assembled and tested, we need to follow the finished item as
it makes its way to the warfighters. And we need to do it without
alerting the enemy or giving away our position.
It’s
not an easy task, but the easiest way to drown on the Titanic was to
pretend there was no iceberg or that the ship wouldn’t sink. Listen up,
Lunchbox, the ship is taking on water and it’s time to get a bucket.
We’re not fooling you. But your foreign supplier might be.
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