Aerial Tanker Update: NOC Walks Away
Competition is a deeply ingrained aspect of our public procurement process. As Marshall J. Doke, Jr. recently testified before the Senate’s Committee on Homeland Security and Governmental Affairs (Subcommittee on Contracting Oversight)—
Competition
requirements in government contracts in this country go back over 200
years and now exist in all 50 states. Competition is required not only
to obtain lower prices but also to prevent unjust favoritism,
collusion, or fraud. I emphasize this last purpose because of what one
federal judge called a growing culture of corruption in Washington. …
I believe the deficiencies in our competition process have given such
enormous discretion to contracting officials that, together with a lack
of transparency, they have created an environment and circumstances
that have contributed significantly to [an] increase in fraud. … The fact that you ‘call’
something competition does not make it real competition. Who thinks
professional wrestling is real competition? What if, in football, the
players are not told how many points they will get for kicking a field
goal? … The significance of this ‘competition’ process is that agencies can, pretty much, award a contract to whichever competitor it wants. Not just ‘agencies,’ but also contracting officers or other source selection officials, can make such decisions. It is this broad discretion, lack
of transparency, and bullet proof award decisions that, I submit,
create circumstances and an environment that can result in fraudulent
activity. There is, I believe, a direct correlation between discretion
and fraud. That is the reason the Government has competition
requirements in government contracts in the first place. That is why
sealed bidding actually is the favored method of contracting if the
Government can describe its requirements adequately. [Emphasis in original.]
The House Armed Services Committee’s Panel on Defense Acquisition Reform recently wrote in its interim report—
The
effects of the current approach to weapon systems acquisition on the
defense industry also are significant. The length and scope of weapon
system programs has accelerated defense industry’s consolidation around
a handful of aerospace firms that now control large amounts of
production capacity across the entire span of the defense acquisition
system. Only the largest firms have access to the resources and
expertise to bid on the most complex programs,
and it is difficult for firms of all but the largest size to survive
losing them. As a result, competition is reduced at the front end of
programs, and all but eliminated in the sustainment phase (often as a
result of poor planning for sustainment). Small businesses are largely
locked out of the process or accorded contracts only on the goodwill of
one of the larger firms. Mid-tier companies are either absorbed or
decide to abandon defense acquisition for the more competitive
commercial sphere, especially after a large weapon system competition
loss. Winning or losing individual contracts becomes such a critical
matter that the incentives to protest contract awards are overwhelming.
The Panel is concerned that the end result of this process is the
gradual erosion of competition and innovation in the defense industrial
base.
Keep
the foregoing in mind as we discuss the recent news that the
EADS/Northrop Grumman team has decided not to submit a proposal for the
KC-X Aerial Tanker, leaving Boeing’s “NexGen” Tanker as the only remaining option for the U.S. Air Force. We’ve discussed this “poster child” for inept major defense acquisition program before, notably here. Click the link for some background, some opinions, and some predictions.
On March 8, 2010, Northrop Grumman issued a press release
in which it announced it would not be submitting a bid. The press
release quoted NOC CEO Wes Bush as saying, “We reached this conclusion
based on the structure of the source selection methodology defined in
the RFP, which clearly favors Boeing's smaller refueling tanker and
does not provide adequate value recognition of the added capability of
a larger tanker, precluding us from any competitive opportunity.” Moreover, the public statement includes a promise
not to submit a protest on the allegedly biased evaluation
methodology. The EADS press release included similar wording.
The
situation leaves Boeing as the sole remaining bidder and apparent
winner-by-default. The question now is whether this situation will
give Boeing control of the tanker’s pricing. Without competition,
there is little incentive for Boeing to slash its costs. And as this New York Times article
notes, every single change made by the Air Force after contract award
will tend to drive up the price. (We note that there is nothing wrong
with that; it’s a normal part of fixed-price contracting.)
Predictably,
European leaders were less than restrained in calling-out the political
implications of the evaluation methodology. Even U.S. leaders noted
that the EADS/NOC team had little to be optimistic about in the new RFP. The New York Times article linked to above reports that Congressman Norm Dicks (D-WA, Chair, House Appropriations Committee’s Defense Appropriations Subcommittee)
said “that he insisted the Pentagon consider how much the smaller
Boeing plane would save in fuel and other costs over 40 years, rather
than just over 25 years, as in the earlier competition. Referring to
Northrop and EADS, he added, ‘I think those factors alone made it almost impossible for them to win.’”
Let’s
ignore the politics and focus on the government contracting. Vern
Edwards, doyen of government acquisition, was kind enough to post the
actual Section M evaluation criteria from the Tanker RFP on the
internet. Following is a cut-n-paste of his post—
In
accordance with FAR 15.304(e), all evaluation factors other than cost
or price, when combined, are approximately equal to cost or price.
* * *
1.1.1
The Government will evaluate the Mission Capabilities Factor (Factor 1)
to determine technical acceptability. The Mission Capability subfactors
(Key Systems Requirements, Systems Engineering, Product Support,
Program Management, Technology Maturity, and Past Performance) will not
be weighted and each subfactor will be evaluated as acceptable or unacceptable. Any subfactor that is evaluated as unacceptable will render the entire proposal unacceptable and ineligible for award.
1.1.2
The Government will evaluate the 93 non-mandatory technical
requirements (Factor 3). Each of these requirements will be evaluated
as having been met or not met. For those non-mandatory requirements
proposed by the offeror which are deemed to have been met, a point
value for that requirement will be awarded as described in paragraph
2.4.2 below. The Government will calculate a total point score for
Factor 2 by adding together all points awarded for each non-mandatory
requirement that the offeror fully meets, except as otherwise indicated.
1.1.3 The Government will evaluate each offeror's Total Proposed Price (TPP) in accordance with Section M, paragraphs 2.3.1, 2.3.1.1, 2.3.2.2, and 2.3.2.3. The Government
will evaluate Total Proposed Price in discounted present value dollars,
defined as TPP (PV), Integrated Fleet Aerial Refueling Assessment
(IFARA), Fuel Usage Rate Assessment (FURA), and Military Construction
(MILCON) in accordance with Section M, paragraphs 2.3.2, 2.3.2.1,
2.3.2.2, and 2.3.2.3. The Government will calculate a present value
total evaluated price (TEP) [Factor 3] for each acceptable offeror by
applying their IFARA, FURA, and MILCON adjustments to their respective
TPP (PV).
1.1.4 The Government will then compare the resulting TEPs for all acceptable proposals to determine the lowest TEP. If
there are no acceptable proposals with a TEP [total evaluated price]
that is less than or equal to 101% of the lowest acceptable proposal
TEP, the Government will award a contract to that acceptable offeror
with the lowest TEP without consideration of the Factor 3 score.
1.1.5
If one or more acceptable proposals have a TEP that is less than or
equal to 101% of the lowest acceptable proposal TEP, the Government
will then compare the scores obtained in the Factor 3 evaluation for
only these proposals, according to the criteria in paragraph 2.4.4.
What
can we conclude from our evaluation of the RFP’s evaluation
methodology? We can conclude that the EADS/NOC assessment was
correct. The evaluation methodology clearly favored Boeing’s smaller
plane and there was almost zero chance that the larger EADS/NOC
aircraft would be evaluated as the better choice.
What leads us to that conclusion. Consider the following:
1. Price is the most important factor; equal to the aggregation of all other factors.
2. The Mission Capabilities Factor (Factor 1) is simply pass or fail. There is no weighting for more capability.
3. Factor
3 includes 93 “non-mandatory technical requirements” that could tilt
the evaluation in favor of the more capably aircraft—but only if the proposed prices are within one percent of each other. In all other circumstances, Factor 3 will not be evaluated.
4. Once an offeror passes Factor 1, then the lowest “Total Evaluated Price” (TEP) wins.
Fact:
smaller planes are always cheaper than larger planes. In fact, Boeing
estimators can provide a rough order-of-magnitude (ROM) cost estimate
if you tell them the weight of a plane and how many engines it has.
Once the Air Force decided to move the evaluation methodology from a
“best value” trade-off (price vs. capability) to a
“lowest-price-technically acceptable” (LPTA) methodology, the larger
plane had almost zero chance of winning the competition.
A while ago, we posted an article
inquiring whether the evaluation methodology might be found to be
illegal, because it failed to comply with the Weapon Systems
Acquisition Reform Act (WSARA). We
thought there was a fairly decent argument that the RFP needed to
conform to the statutory requirements, though (as noted) Northrop has
declined to pursue a course of action that would test this argument. Regardless,
the fact that this huge MDAP is being awarded without effective
competition is—or should be—embarrassing to the Obama Administration,
which has publicly committed to reduce
“the combined share of dollars obligated through new contracts in FY
2010 that are: … awarded non-competitively and/or receive only one bid
in response to a solicitation or a request for quote ….”
Payments Under Undefinitized Contract Actions
Recently we discussed
use of payment withholds to spur contractor action to correct alleged
deficiencies in its various internal control systems (now called
“business systems” for an unknown reason). We noted (and linked to) a
recent controversy about whether DOD showed favoritism or exercised improper influence with respect to
its largest Logistics Capability (LOGCAP) contractor, KBR. The story
is that two commanding generals in the Southwest Theater of Operations directed the cognizant Contracting Officer not to impose
a 15 percent payment withhold on KBR’s invoices, even though it was
operating under a Undefinitized Contract Action (UCA) and the FAR
seemingly required such a withhold. Eventually an official waiver was granted, but in the meantime the situation was … murky. We
noted that applicable statute and regulation requires definitization of
UCA generally within 6 months, but KBR had been performing without a definitized Task Order for more than three years.
Our position on this issue is pretty straightforward. If the DOD can’t
get its act together and negotiate a firm price within the required
timeframe, then it is unfair to penalize the contractor, who must
continue to perform regardless. DOD’s failure to comply with law and
regulation gives it “unclean hands” and it should not profit, to the
other contracting party’s detriment, in such circumstances.
In
what is perhaps a related move, on March 5, 2010 the DOD published in
the Federal Register a revision to DFARS, implementing an interim rule,
to make “the limitations on payment of costs prior to definitization of
unpriced change orders applicable to all categories of undefinitized contractual actions.” The interim rule purports to implement § 812
of the 2010 National Defense Authorization Act. What it does is revise
one sentence and adding a new sentence. According to the rule (found here)—
Section 217.7401 is amended by revising paragraph (a)(2) and adding
paragraph (a)(3) to read as follows:
217.7401 Definitions.
* * * * *
(a) * * *
(2) It includes task orders and delivery orders.
(3) It does not include change orders, administrative changes, funding
modifications, or any other contract modifications that are within the
scope and under the terms of the contract, e.g., engineering change
proposals, value engineering change proposals, and over and above work
requests as described in Subpart 217.77. For policy relating to
definitization of change orders, see 243.204-70.
As always, the public may submit comments to www.regulations.gov, citing DFAR Case 2009-D035.
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Using Contractors to Support Warfighters—Cost Savings or Wasteful Spending?
Recently the Government Accountability Office (GAO) issued a letter to Congress (GAO-10-266R, Warfighter Support) comparing the cost of using contractors versus the cost of using Government employees in military support
operations. As everybody (including GAO and Congress) knows, at this
point the DOD is almost entirely reliant on contractors to support its
in-theater operations. Regardless of whether you think that’s a good
or bad thing, it’s an uncontroverted fact. More recently, DOD has
announced its intention of “in-sourcing” some functions currently
performed by contractors, gearing up to hire as many as 20,000 new
employees.
We recently posted
an article on “contrarian” views published by the Lexington Institute.
The author, Dr. Loren Thompson, asserted that adding more positions
wasn’t the right answer. In summarizing Dr. Thompson’s thoughts, we wrote—
Adding more acquisition, audit, and program management professionals to DoD’s ranks … will compound the problem.
… Dr. Thompson notes that those new heads will take additional
funds—not just to cover the costs of salary and benefits, but also to
cover the costs of training, equipping, housing and supporting them.
As Dr. Thompson notes, ‘When you add up all these costs, the long-term
burden of taking on 20,000 new acquisition professionals will be over
$80 billion -- which just happens to be the projected cost of buying a
replacement for the Trident ballistic-missile sub.’
So when GAO’s analyzes the relative cost of hiring contractors versus hiring Government employees, it is relevant to our interests.
The
GAO “report” (we hesitate to call it a report because it is not in the
usual GAO report format) started off by noting a 2005 Congressional
Budget Office (CBO) report that concluded “over a 20-year period, using
Army military units would cost roughly 90 percent more than using the
contractor.” But it also noted a 2008 CBO report that concluded “for
the 1-year period beginning June 11, 2004, the costs of the private
contractor did not differ greatly from the costs of having a comparable
military unit performing similar functions.” Accordingly, the results
of this GAO analysis would be an interesting addition to the history of
the topic.
The
GAO next notes that DOD was unable to provide it with sufficient
information to conduct a meaningful analysis, so it was forced to look
only at the State Department’s use of military contractors. While
that’s better than nothing, it is disappointing that GAO couldn’t get
the necessary DOD information that would have permitted it to really
add to the on-going debate on the subject.
GAO
reviewed four task orders from the State Department’s Worldwide
Personal Protective Services (WPSS) II contracts and one contract for
Baghdad embassy security. As GAO reports—
Our
comparison of likely State Department costs versus contractor costs for
four task orders and one contract awarded by the State Department for
security services in Iraq showed that for
three of the task orders and the contract, the cost of using State
Department employees would be greater than using contractors, while the
State Department’s estimated cost to use federal employees was less for
the other task order. For example, using State Department employees to provide static security for the embassy in Baghdad would have cost the department
approximately $858 million for 1 year compared to the approximately $78
million charged by the contractor for the same time period. In
contrast, our cost comparison of the task order for providing personal
security for State Department employees while in the Baghdad
region—which required personnel that have security clearances—showed
that for this task order, the State Department’s estimated annual cost
would have been about $240 million, whereas the contractor charged
approximately $380 million for 1 year.
(Emphasis added.)
So
in three of four contract scenarios evaluated, using contractors
actually saved the State Department money. And not just a little bit
of money—GAO reported that use of Government employees was more than 10 times more expensive
than using contractors. Moreover, where use of Government employees
would have been cheaper, GAO noted that “because the State Department
does not currently have a sufficient number of trained personnel to
provide security in Iraq, the department would need to recruit, hire,
and train additional employees at an additional cost of $162 million.”
In other words, when one adds the additional $162 million in government
costs to the State Department’s estimated annual estimated cost of $240
million, one gets $402 million versus the contractor’s charges of $380
million—i.e., the contractor is marginally cheaper.
To sum up, GAO found no instance where use of State Department
employees to replace contractors would result in any cost savings to
the U.S. Government or to the taxpayers.
What drove the Government’s costs? GAO reported that—
… over
one-half of the State Department’s estimated costs for deployed
employees were to cover costs required to sustain the employees
overseas. The State Department’s estimated cost to provide security
included components such as salaries, benefits, cost of living
allowances and overtime, overseas costs, and other support costs
associated with deploying and sustaining U.S. citizen employees
overseas. Overseas costs included things such as furniture, furnishings
and equipment for office spaces and residences, maintenance and repair
of living quarters, and travel cost for rest and relaxation for
deployed personnel.
In addition, GAO noted
that “some costs associated with providing Iraq security services using
federal employees—such as developing new career fields, providing
additional overhead, and building new housing—are difficult to
quantify.”
So to those who think
the costs of the “Global War on Terrorism” were driven up by increased
use of contractors, this GAO report seems to an effective rebuttal.
It’s too bad the DOD couldn’t or wouldn’t provide sufficient
information to put a final nail in the coffin of that point of view.
New DFARS Rule Focuses on Role of Contractors in Crisis Situations
Last September we told you about an August 2009 DOD Class Deviation
that addressed continuity of mission critical services that will
“enable agencies to continue their essential functions across a broad
spectrum of emergencies.” The Class Deviation provided DOD Contracting
Officers with clauses that contained language directed at certain
contractors, such as “expected to use their best efforts to continue
providing such services, in accordance with the terms and conditions of
their contracts even during periods of crisis." We noted that the new
clauses might create some ambiguity between them and the “excusable
delays” and “termination for default” clauses, which specify rights and
remedies for the contracting parties when the contractor cannot perform
the work. Finally, we opined that “it is nice to require ‘full
cooperation’ during times of emergency, but it is doubtful how much
contractors can actually do to compel employees to come to work, if
they choose not to.”
So it should not come as any great surprise that on March
5, 2010, DOD published in the Federal Register notification of intent
to promulgate an interim rule codifying its 2009 Class Deviation into
an official DFARS regulation. See the Federal Register notice here.
The
interim rule established a new DFARS Subpart—237.76 “Continuation of
Essential Contractor Services”—that provides definitions of the terms
relevant to the issue, a policy statement, and a new contract clause
for DOD contracts. The new clause (252.237-7023) performs much the
same function as the clause(s) contained in the Class Deviation. It
puts the contractor on notice that some or all of its services provided
under the contract are considered to be “essential contractor services”
as that term is defined in the regulations, it requires preparation of
a written plan “for continuing the performance of essential contractor
services … during a crisis,” and requires notification and cooperation
in the event of non-performance. For cost accountants, note that the
clause requires segregation of all costs incurred in “continuing
performance of essential services in a crisis situation,” as well as
notification of any associated contract cost impact within 90 days
after commencement of those continued services. Finally,
this language in the new clause caught our attention: “As directed by
the Contracting Officer, the Contractor shall participate in training
events, exercises, and drills associated with Government efforts to
test the effectiveness of continuity of operations procedures and
practices.”
On
a related note, the DFARS revision is being promulgated as an “interim
rule” because “This action is necessary to ensure that essential
contractor services are not interrupted by crises such as those caused
by hurricanes, tornados, earthquakes, blizzards, floods, or pandemic
influenza.” Curiously, we were unable to locate any mention of the
existing Class Deviation, which would seem to reduce the urgency of the
matter.
As always, the public may submit comments on new promulgations at www.regulations.gov. Mention DFARS Case 2009-D017 in your submission, should you choose to make one.
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