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Apogee Consulting Inc

Aerial Tanker Update: NOC Walks Away

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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 ….”




 

Using Contractors to Support Warfighters—Cost Savings or Wasteful Spending?

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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

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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.




 

Payments Under Undefinitized Contract Actions

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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.


 

Changes to Socioeconomic Program Rules

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The various constituencies that comprise the U.S. Government’s socioeconomic program are difficult to track and report.  Just off the top of our heads, contractors subject to socioeconomic program reporting requirements need to track awards made to general Small Businesses, Small Disadvantaged Businesses, Woman-Owned Small Businesses, Veteran-Owned Small Businesses, and Service-Disabled Veteran-Owned Small Businesses.  Not to mention HUBZone area businesses, Labor Surplus area businesses, 8(a) businesses, and ANCs.  Naturally, socioeconomic reports generally contain numerous inaccuracies, mostly made inadvertently.  But sometimes there is a knowing failure to report accurately, which leads to legal and financial problems.

Even more difficult is navigating the procurement rules that apply to each “flavor” of socioeconomic program.  For example, contracts can be set aside for only 8(a) firms to bid on, but only if the contracting officer’s market research indicates that two or more responsible entities are available to compete for the work—unless, of course, one of the prospective bidders is an Alaska Native Corporation (ANC) in which case the contract need not be competed and can be awarded on a “sole-source” basis to the ANC. 

If you are a Contracting Officer in the employ of the Federal government, figuring out which program has priority over the others is a non-trivial challenge.  Recently, there has been significant controversy in the socioeconomic program prioritization, with GAO determining that the SBA’s interpretation of socioeconomic program statutory language was flawed, and the OMB directing Contracting Officers to ignore the GAO’s interpretation in favor of the SBA’s interpretation.  Over at the WIFCON Blogsite, “Don Acquisition” had this to say on the subject, back in November 2009—

There has been a considerable amount of controversy over the last year or so in the area of small business programs. In International Program Group, Inc., (B—400278, B—400308, 19 September 2008) the Government Accountability Office (GAO) held that HUBZone set-asides took priority over service-disabled veteran-owned small business (SDVOSB) set-asides and SDVOSB sole source acquisitions. This was unsurprising given the clear language in the FAR. In Mission Critical Solutions (B—401057, 4 May 2009) (also see reconsideration), the GAO held that the HUBZone set-asides took precedence over the 8(a) program. This was surprising given the clear language of the FAR. Of note in both cases was that the GAO solicited and rejected the Small Business Administration's (SBA's) interpretation of the applicable statutes, which was that there was parity among the 8(a), HUBZone, and SDVOSB programs. It was after the latter case that the Office of Management and Budget (OMB) stepped in with a memorandum advising agencies to disregard the two GAO decisions and providing the following guidance:


Pending the completion of the legal review of the GAO's decisions by the Executive Branch, the SBA's ‘parity’ regulations should not be disregarded by contracting officers, and Federal agencies should not, as a result of the GAO's decisions, be compelled to prioritize HUBZone small businesses over 8(a) BD or SDVOSBs. Instead, until the legal review is completed, Federal agencies should continue to give active consideration to each small business program pursuant to their pre-existing contracting practices and ‘parity’ policies.


Remarkably, this guidance 1) assumes that contracting officers had been following the parity policies implemented in SBA's regulations and 2) implies that, henceforth, contracting officers are free to treat HUBZone, SDVOSB, and 8(a) contractors as equals. There is no acknowledgement of the fact that there were no pre-existing "parity" policies in the FAR. Prior to the GAO decisions, the FAR Council issued a proposed rule that would have implemented parity among the three programs—something that clearly did not exist in the FAR. See 73 FR 12699. As of today, the FAR Case dealing with Socioeconomic Program Parity (2006-034) has been tabled. As such, any contracting officer subject to the FAR that thinks that they have been given the green light to disregard the FAR and treat all three programs the same should think again.

Whew.  If you got all that, then you are indeed impressive.  In any case, “Don Acquisition’s” advice proved prescient, because the U.S. Court of Federal Claims just ruled on the matter over here.  The plaintiff, once again, was Mission Critical Solutions, taking “another bite at the apple.”  We’ll skip over the detailed legalese and discussion of statutory interpretation, deference to agency interpretation, the true meaning of the phrase “notwithstanding any other provision of law,” and all that.  We’ll cut directly to the chase.  Here’s what Chief Judge Hewitt said on March 2, 2010—

Plaintiff has succeeded on the merits of this case. The court has examined the statutory language of the Small Business Act and concluded that the mandatory language of the HUBZone statute requires that a contracting officer first determine whether the specified criteria are met before awarding a contract under another small business program or on a sole-source basis. … The Army’s award of the contract to Copper River on a sole-source basis without first determining whether there was ‘a reasonable expectation that not less than [two] qualified HUBZone small business concerns will submit offers and that the award can be made at a fair market price’ was not in accordance with law--in particular, the contract award did not comply with the plain meaning of the HUBZone statute.

It’s likely that the decision will be appealed but, in the meantime, “Don Acquisition” should be congratulated for his discernment.

In other news, the Small Business Administration announced proposed rule changes to the “Woman-Owned Small Business Federal Contract Program.”  As far as we can tell, the rule retains some of a prior final rule’s language, withdraws language associated with a previous proposed rule, and proposes new language for comment.  See the announcement here.  We could discuss some of the proposed changes but—quite frankly—if you thought the foregoing was dense and headache-inducing, you should see the content of the 30-page Federal Register notice.  We’ll pass on that, thank you very much.


 
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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.