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GAO Discusses Key DOD Programs; DOD Gets Ready to Report Nunn-McCurdy Breaches to Congress

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On March 30, 2010 the Government Accountability Office (GAO) issued its annual “Assessment of Selected Weapon Programs” (GAO-10-388SP).  The report, a 173-page tome, discussed the current status of 70 different major defense programs.  It focused on technological maturity at three different points in the program lifecycle and discussed the current cost, schedule, and technical challenges of each program.

Overall, GAO made the following key points:

  • A majority of programs changed key systems requirements after development start. Only a few programs reported holding configuration steering boards to review requirements changes, significant technical changes, or de-scoping options in 2009.
  • Many programs are at risk for cost growth and schedule delays because of software development issues.
  • Programs’ reliance on nongovernmental personnel continues to increase in order to make up for shortfalls in government personnel and capabilities.

Looking at the individual programs, GAO made some interesting observations.  We are (obviously) not going to repeat all of them, but the following comments caught our eyes:

  • EA-18G “Growler” – The report detailed a difference of opinion between the Navy and DOD’s Director of Operational Test & Evaluation (DOT&E).  The Navy found the Growler to be both “operationally suitable and operationally effective” while DOT&E found the aircraft “to be operationally effective for most missions and not operationally suitable.”  The issue seemed to be the “poor reliability of the ALQ-99 jamming pod” plus issues with simultaneous operation of the active electronically scanned array (AESA) radar and the airborne electronic attack suite.
  • Joint Air-to-Surface Standoff Missile (JASSM) – The report stated that the program “has a history of cost growth, due primarily to reliability issues” and that the program “experienced a Nunn-McCurdy unit cost breach” in 2007 and was restructured in 2008.  In 2009, “the Air Force stopped accepting delivery of … missiles and delayed negotiations … after 4 out of 10 missiles failed during flight tests ….”  GAO noted that “recent Lot 5 test results raised concerns about the maturity and quality of the program’s manufacturing process. Independent reviews have found that JASSM’s reliability issues are primarily driven by supplier quality control problems.”
  • Space Based Infrared System (SBIRS) High GAO reported that this satellite program “continues to experience setbacks that could add to cost overruns and schedule delays. All three of the program’s critical technologies are mature and 99 percent of the expected drawings are releasable. However, program costs continue to increase due to software development problems, hardware quality issues, and testing delays on the first GEO satellite. Unplanned work continues to be a challenge for the software development effort. The program also recently discovered hardware defects on the first GEO satellite.”  GAO reported that “The SBIRS High program remains at high risk for cost and schedule growth. DCMA is currently projecting over $245 million in cost overrun from the current baseline at contract completion. This amount has more than doubled in the past year and continues to steadily grow. In December 2009, program officials began coordination to rebaseline the program to more realistic cost and schedule goals. Air Force officials expect the rebaselining effort to take about 9 months, and be completed in mid-to-late 2010. Additional contractor cost increases and schedule delays are expected due in part to hardware rework on the first satellite, continued difficulty with the flight software development, and delays in integration and test activities. The program’s management reserve— funds set aside to address unanticipated problems— will likely be depleted before the first GEO satellite launches, and additional funding could be required if future problems occur. Additional schedule delays could also occur since meeting current launch estimates depends on the results of system-level integration tests.
  • Virginia-Class Submarine (SSN 774) – GAO reported that “The Navy has identified extensive quality assurance problems at one of the Virginia-class shipyards. These problems include multiple contractor errors on Virginia-class submarines, the most recent of which involved the installation of weapons loading systems. Navy officials reported that the error in the weapons loading system installation does not affect deployed submarines. The Navy continues to investigate the extent of the quality assurance problems and the potential cost and schedule implications.”

Meanwhile, InsideDefense.com recently reported that the ATIRCM/CMWS program (which is intended to protect Army helicopters against infrared-guided missile threats) has breached its Nunn-McCurdy thresholds.  It did so not because of technology maturity issues, requirements changes, or contractor quality problems.  It did so because last year the program was restructured into three subprograms, one of which experienced cost growth.   (We previously discussed Nunn-McCurdy limits in this article.)  According to InsideDefense.com, “The original ATIRCM objective was 3,400; the decision to slash the buy to just 208 amounted to a 93 percent cut—a change that drove the unit cost into ‘critical’ Nunn-McCurdy breach territory.” 

In addition, that same source reported that a “major satellite program” also breached Nunn-McCurdy thresholds, “forcing the Defense Department to choose between killing the program or certifying to Congress that it must continue.”  The InsideDefense.com article reports that the Wideband Global Satellite (WGS) program “has increased by more than 25 percent over the current baseline, exceeding the Nunn-McCurdy law’s critical unit cost threshold.”  Air Force Secretary Michael Donley reported told Congress in a letter that the breach stemmed from “production breaks [of a two-year duration] and new plans to buy two more satellites.”  Donley also “stresses the first three satellites had ‘an artificially low cost’.” 

According to the article, “an industry source said the contractor, not the government, eats cost increases when they occur” under the program’s fixed-price contract type.  However, we can speculate that it is possible for the contractor to insist on “get-well” funds if the customer wants to purchase new, unplanned, satellites (as is the case here)—in a manner similar to how Boeing insisted on certain terms and conditions related to its Air Force launch contracts.

Finally, InsideDefense.com also reported recent remarks by Dr. Ashton Carter (USD, AT&L) regarding the Pentagon’s troubled programs.  When asked about other DOD programs that warrant similar scrutiny as that applied to the Joint Strike Fighter, the site reported Dr. Carter’s remarks as follows—

I don’t know where to start.  There are so many.  There are too many programs that resemble the Joint Strike Fighter in the sense that they are not performing in the way that they said they were going to and that we expected.  There are lots of reasons for that.  It’s obviously very troubling to me. 

We have posted over and over again on the importance of meeting program expectations in the current budgetary environment.  These various reports indicate that there is still room for improvement.




 

DARPA in the News

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The Defense Advanced Research Projects Agency (DARPA) is in the news again.  Actually, it’s in the news most every day.  What we mean to say is, it’s back on Apogee Consulting’s radar screen with a couple of items we think are of interest to our clients and visitors.  (We last reported on DARPA’s budget request here.)

First, this Aviation Week “Ares” blog article discusses the role of complexity in the aerospace industry design process.  The article reports that DARPA believes that the industry’s antiquated MIL-STD-499A systems engineering approach—the famous “Vee”—is to blame for much of the recent spate of cost overruns and schedule slips.  DARPA produced the following chart to illustrate its point—


DARPA Chart.jpg

As the Ares blog noted, “Integrated-circuit makers have held development times steady even as chips have soared in complexity. Car manufacturers have actually reduced their development timespans. Only the aerospace industry, according to the chart, has seen development time (and cost) increase in lockstep with product complexity.”

Ares reported that—

The research agency sees a lot of problems with the process, arguing that because detailed design is done within functional stovepipes that are ‘based on arbitrary cleavage lines’ - like between power and thermal management - when components and subsystems come together during integration there are ‘unmodeled and undesired interactions’ that force redesigns, driving up delays and costs.

To address the issue, DARPA is reportedly launching “META” to try to change the old system engineering paradigm.  As Ares reported, “A key part of META is using complexity as the metric, rather than the traditional SWaP - size, weight and power. Apply that to the F-35 and you can begin to see why development is proving so difficult. A complexity metric would, DARPA says, allow ‘cyber-vs-physical’ trades - between implementing a function in software or hardware - and trade-offs between complexity, performance, cost, etc.”

Second, DARPA has reportedly “scrapped plans” to develop its “Rapid Eye” program, according to this article.  Rapid Eye envisioned encapsulating a folding ISR drone inside an inter-continental ballistic missile, which would put surveillance assets on scene—anywhere in the world—within an hour.  As the article noted—

--the rocket-launched drone had some serious conceptual flaws. For starters, lobbing an ICBM across the planet without warning could be mistaken for a surprise nuclear attack. That’s the same general issue that plagues other high-speed, hit-anywhere-in-the-world weapons concepts like Prompt Global Strike. If you want to put non-nuclear payloads like a drone or a conventional warhead on a ballistic missile, you need to make sure you don’t trigger Armageddon.

So Rapid Eye is closed for good.  But as META shows us, DARPA is still trying to create the future today.




 

US Air Force Implements DCAA/Contracting Officer Resolution Process

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As we previously reported, DOD has moved to rectify the dysfunctional relationship between DCAA and its contracting officers—although we have opined that much of what has been published looks like window-dressing and fails to address fundamental problems.  Regardless of our opinion(s) on the matter, any progress is better than the stalemate between audit and contracting that had become the status quo in the Defense acquisition process. 

So we are pleased to note that the military services have begun to flow-down the DOD resolution policy to their contracting officers.  As far as we know, the first to do so was the US Air Force.  On March 17, 2010, the USAF issued this memorandum that “sets forth Air Force policy for resolving significant disagreements when the Contracting Officer does not concur with DCAA recommendations while establishing pre-negotiation objective[s].”  The policy set forth is essentially a verbatim recap of Shay Assad’s December 2009 memo.  (You can find a link to his memo in the first link above.)

To tailor the policy to the Air Force, the memo states that—

Should DCAA request Air Force management review, the Contracting Officer will advance this issue through their management chain and provide the name and phone number of the Senior Contracting Official (SCO) or Senior Center Contracting Official (SCCO) to the cognizant DCAA representative.  If the parties are still in disagreement, the SCO or SCCO will advance the issue to the HCA [Head of Contracting Activities] to support any request from DCAA for further resolution.

As we have noted, there are many opportunities for disagreement between Contracting Officers and auditor that do not involve establishing pre-negotiation objectives related to questioned costs.  For instance, determination of “business system” internal control system adequacy does not necessarily involve negotiating an amount of questioned costs, and determining whether a contractor is or is not in non-compliance with Cost Accounting Standards does not necessarily involve negotiating an amount of questioned costs.  In other words, while the DOD resolution process is a small step forward, it does not address all the existing issues.




 

Another Story of Waste, Fraud, and Abuse in Iraq—Or Is It?

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As the Commission on Wartime Contracting in Iraq and Afghanistan (CWC) was conducting a hearing on March 29, 2010 to discuss “rightsizing and managing contractors during the drawdown in Iraq,” a DOD Inspector General report was being brought to the attention of the press.  The report alleged that maintenance services provided by LOGCAP III contractor KBR (aka Kellogg, Brown & Root, formerly known as Halliburton) were in excess of the level actually needed.  In the words of the DOD IG—

--the utilization of contractor-provided tactical vehicle field maintenance services was less than the 85 percent required by Army Regulation 750-1.  Specifically, from September 1, 2008, through August 31, 2009, the rate ranged from a low of 3.97 percent to a high of 9.65 percent. This occurred because the task order 159 statement of work did not contain requirements for the contractor to report utilization data and supporting documentation to the Army. In addition, the Army was not conducting adequate reviews of contractor utilization data provided by KBR and taking proper corrective action. As a result, about $4.6 million of the $5 million in costs incurred by DOD were for tactical vehicle field maintenance services that were not required. The Army internal controls were ineffective in monitoring contractor-provided tactical vehicle field maintenance services.

Mother Jones is a “bimonthly magazine of investigative journalism that exposes the evils of the corporate world, the government, and the mainstream media.” Mother Jones, bastion of “smart, fearless journalism” read the DOD IG report from which the above quote was taken, and reported it to their readers with the headline,KBR Bills $5 Million For Mechanics Who Work 43 Minutes a Month.”  If you click on the link, you’ll see that the Mother Jones article included quotes from CWC co-chair Chris Shays and member Charles Tiefer, both critical of KBR.

The DOD IG report was issued in early March; the media picked it up on March 25, just a couple of days before the CWC hearing on the same subject.  Coincidence?  We think not.

As Mother Jones reported—

On March 29, the bipartisan Commission on Wartime Contracting—which Congress set up in early 2007 to investigate waste and corruption in the military private sector—will hold a hearing to examine whether contractors are doing their part to prepare for leaving Iraq. Some commissioners are raring for a showdown with KBR over its drawdown plan—or lack thereof. The commission's co-chair, former Republican congressman Christopher H. Shays, said in a statement: Considering that KBR was just awarded a task order—now under protest—that could bring them up to $2.3 billion in new [Iraq-related] revenues, it's very important that we get a clear picture of the quality of planning and oversight during the Iraq drawdown.’  The Balad report is likely to be a hot potato at the hearing. Commissioner Charles Tiefer tells Mother Jones the report is a dynamite critique of the firm's practices. The numbers translate into an astonishingly large pool of KBR employees standing around idle and having the government be charged, he says.

It’s interesting (to us, at least) that the thrust of the media reports is that, somehow, KBR is at fault for maintaining staffing levels in excess of those needed.  While KBR may not be entirely innocent in this debacle, the DOD IG report (quoted above) clearly points a finger at the Army’s contracting and oversight as the root cause of the problem—and holds KBR largely blameless.  (We note assertions that KBR failed to cooperate with Army oversight officials, including refusing to provide information regarding its staffing levels.  If the contract was a Firm, Fixed-Price (FFP) type, the contractor may not have been required to provide that kind of detailed information.)

Over the past year, the CWC has been vocal in its criticism of the Defense Department’s ineffective oversight and management of contractors supporting warfighters in Southwest Asia.  It’s puzzling that their public criticism on this issue would focus on the contractor and omit any finger-pointing at the Army contracting officers and support staff (which is where the DOD IG said the problem lay).  So while the CWC blames everybody except the culprits, Mother Jones and other media outlets get a nice opportunity to voice outrage at KBR and other contingency contractors.

Pat Fitzgerald’s First Testimony

While we’re on this subject, we note that the CWC hearing marked Pat Fitzgerald’s first public testimony as Director of DCAA.  His sixteen-page typewritten testimony can be found here.  Mr. Fitzgerald’s testimony covered—

  • Update on DCAA Contingency Contracting Audit Efforts
  • Oversight of Contingency Contractors
  • Contractor Business System Audits
  • Economy and Efficiency Audits
  • Current Status of the Drawdown Audit

Mr. Fitzgerald made some interesting points in his testimony.  Following is a brief recap of some of those points; if you would like the details, then clink on the link above.

Since May 2009 (a period of about 10 months), DCAA has issued 23 “suspected irregularity referrals” (aka Form 2000).  DCAA uses Form 2000 when it suspects that fraud, or other “irregular conduct” has occurred.  Appendix 1 to his testimony lists those 23 referrals by issue.  The issues range from “billed retainage from subcontractors” to “failure to eliminate subcontractor errors” to “travel invoices appear fraudulent” to “possible bid rigging of insurance coverage” to “human trafficking and withholding of employee passports” to “avoidance of paying payroll taxes.”  In other words, the list is a veritable “soup-to-nuts” litany of soupçons of suspicious behavior

With respect to audits of contractor “business systems,” Mr. Fitzgerald noted that “We believe that the real time reporting of significant deficiencies/material weaknesses of a particular system as opposed to an overall audit opinion on the adequacy of each of those systems is a better approach.”  DCAA’s “revised approach will no longer require an opinion on the overall adequacy of the system of internal controls. Instead, the opinion will be limited to determining compliance with the applicable DFARS criteria. Our approach will result in increased transaction testing while ensuring that deficiencies are reported on a real time basis.”

We are excited to see DCAA move away from its binary pass/fail system audits towards a more meaningful report of control system deficiencies.  Our optimism is tempered however, by our concerns for the proposed DFARS contractor business systems rule that seems to omit any discussion of materiality and to expect perfection, with onerous penalties for a single mistake.  We are also concerned about a soi-disant independent and bipartisan commission that seems determined to make headlines at the expense of the truth, aided and abetted by certain media outlets that seem to favor attention-grabbing headlines instead of simply reporting the facts.  Color us naïve and idealistic, but we think taxpayers deserve better.


 

Criminal Conflict of Interest

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On March 26, 2010 the Department of Justice reported that a former Department of Energy (DOE) employee, Ms. Donna Scott, had pled guilty to criminal conflict of interest and her husband had pled guilty to making a false statement to a federal agent.  We have written before about both organizational and personal conflicts of interest—notably here and here.  There is a proposed rule in play that would establish standards for contractor personal conflicts of interest similar to those already in place for government employees, making this an issue applicable to pretty much everybody.

According to the DOJ announcement, Mrs. Scott “coordinated the use and renovation of DOE office space.”  Included in her duties was the oversight of the renovation of a lobby and conference room in a DOE building in Germantown, MD.  Her duties also included the acquisition of new furniture for those spaces.  While employed by DOE, she “recommended to a co-worker that the co-worker obtain price quotes for furniture from her husband, Timothy Scott. Timothy Scott provided these price quotes to Donna Scott’s co-worker, both of which referenced Timothy Scott as the manufacturer’s representative.”  However, the co-worker was told that she needed two additional price quotes in order to “satisfy competitive bidding requirements.”

So, to help her co-worker satisfy “competitive bidding requirements,” Mrs. Scott—

--admitted that she subsequently obtained two additional price quotes for each transaction from her husband and provided them to her co-worker as the competitive price quotes. Donna Scott admitted that she knew, unlike the original price quotes, that none of these new price quotes referenced Timothy Scott by name. Moreover, the additional quotes bid a higher price for the furniture than the initial quote, making Timothy Scott’s original bid the lowest.

Mrs. Scott’s co-worker used the three quotes to justify why Mr. Scott’s low bid was fair and reasonable, and DOE then purchased the furniture from Mr. Scott.

In addition to the foregoing, Mrs. Scott—

--selected furniture worth approximately $300,000 from particular manufacturers for the cafeteria renovation project. [She] admitted that she knew these manufacturers’ representatives planned to use her husband as their dealer of record for these transactions, thus earning her husband a commission. [She] arranged for the furniture to be purchased by the General Services Administration (GSA) on behalf of the DOE. As a result, Timothy Scott earned approximately $24,174 in commissions from the manufacturers.

According to the DOJ announcement, “Donna and Timothy Scott each face maximum sentences of five years in prison and fines of $250,000 or the greater of twice the gross gain or loss from the offense. U.S. District Judge Peter J. Messitte has scheduled sentencing for June 3, 2010.”

 


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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.