Lexington Institute Publishes “Contrarian” Viewpoint on Acquisition Reform
What is the Lexington
Institute? It is a policy institute (i.e., “think tank”) focused on
issues such as national security, education, taxation, and
immigration. In its own words—
The Lexington
Institute believes in limiting the role of the federal government to
those functions explicitly stated or implicitly defined by the
Constitution. The Institute therefore actively opposes the unnecessary
intrusion of the federal government into the commerce and culture of
the nation, and strives to find nongovernmental, market-based solutions
to public-policy challenges. We believe a dynamic private sector is the
greatest engine for social progress and economic
prosperity.
Here is a link to the Lexington Institute’s
home
page. In
addition to scholarly works, it also publishes the “Early Warning”
blog. One of the blog posts, by Dr. Loren Thompson, caught our eye
with the interesting title: “Weapons Spending: Much of the
Logic Behind Acquisition
Reform is Flawed.” See the
entire post here. We agree—and have posted similar thoughts in
the past. (See this
article or this
one).
We encourage visitors
to read the linked article in its entirety. To summarize, though, Dr.
Thompson makes the following four points.
1.
Competition does not
improve performance, but it does lower efficiency. The Government
doesn’t need to hold competitions to drive best value acquisitions or
to incentivize contractor performance. There are plenty of contracting
tools in the Government’s toolkit to motivate contractors to operate
efficiently. As Dr. Thompson says, “The notion
that normal rules of competition can be made to work in a system
of monopsonybuyers and oligopolistic sellers
is nonsensical, because the market is too distorted to function
normally. If there are to be two suppliers, then the sole customer must
pay for two sets of everything -- design teams, production facilities,
spare parts, etc.”
2.
Use of Fixed-Price
contract types does not control contractor cost growth, but it does
encourage contractors to bid high prices. Dr. Thompson asks, “Is it
really so hard to fashion a cost-plus approach to weapons development
where the contractor is rewarded for holding down costs rather than
encouraged to bid high from day one?”
3.
Contractors are
encouraged to bid low, and cost realism is never rewarded. Because the
top-tier of defense contractors is largely interchangeable, the
distinguishing characteristic between bids is often price. Dr.
Thompson asks, “What source-selection authority is going to pick the
system that costs a billion dollars more when all of the competing
solutions meet performance requirements?” He cites the
recent award of the multi-billion dollar FMTV
award to Oshkosh as a prime example of this rule, where he asserts that
Oshkosh’s bid was “30% below what the incumbent is currently charging
for identical trucks,” and Oshkosh’s profit projection
was based on receipt of “financial aid from state and local
governments.”
4.
Adding more
acquisition, audit, and program management professionals
to DoD’s ranks won’t solve the myriad problems with the Pentagon’s
acquisition process, but it will compound the problem.
We are all familiar
with the lack of Government resources in this area, and the current
reliance on contractors to augment short-staffed contracting offices.
But 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.”
Researching DOD’s QDR and FY 2011 Budget Request
Thanks to the National Defense Industrial
Association (NDIA) for making the latest DOD Quadrennial Defense
Review (QDR) and its FY 2001 Budget request easy to research. We
previously wrote about DARPA’s FY 2011 Budget Request, and
provided some highlights gleaned from its 500+ pages of
discussion. That’s a lot of
information to get through, and DARPA is small potatoes compared to the
entire Defense Department.
So we are pleased to acknowledge NDIA’s recent
“Legislative and Federal Issues Update,” which contains several tools
that can be used to facilitate research.
· QDR
documents can be found here.
· Don’t
know what the QDR is and why it’s important to the future of DOD’s
program prioritization (and therefore funding prioritization)? Go
here
first.
In addition, NDIA provides several resources
covering DOD’s FY 2011 Budget request. These include:
· Program Costs by Weapon System, an overview of
each major acquisition program. It can be found here.
· The FY 2011 Defense Budget “Fact
Sheet” available
here.
· Defense Budget Overview Book,
available here.
Finally, the DOD’s FY 2011 Defense
Budget Briefing Charts can be found
here.
Companies of all sizes that sell
goods and services to the Pentagon should become members of industry
advocacy groups. Not only do the groups advocate on behalf of the
entire industry and often have access to legislative committee staff
members, but such groups are an excellent way to network with other
contractors and to get access to information such as that noted above.
Want to join NDIA? Then go here.
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Army Reconsiders, Reconfirms FMTV Award to Oshkosh
Our latest report
on the on-going saga of the Army’s Family of Medium Tactical Vehicles
(FMTV) award indicated the areas of protest—both the areas sustained
and those denied by the GAO. At that time, we predicted, “unless the
Army seriously misevaluated the offers, or seriously misled the GAO, we
don't think the original award to Oshkosh will be changed.” Looks like our prediction was spot-on.
On February 12, 2010 the Army announced that it had completed its “re-evaluation” and, as a result—
Oshkosh
Corp. has been awarded a competitive, five-year requirements contract
for production of up to 12,415 trucks, 10,926 trailers, and associated
support and engineering services. The total estimated contract value at award was $3.023 billion.
The official announcement notes that a peer-review of the re-evaluation was performed by the Office of the Secretary of Defense.
This is bad news for BAE Systems, whose Sealy, Texas subsidiary was the FMTV incumbent contractor. According to this report by the Wall Street Journal—
With
confirmation of this decision the group will include in its 2009
accounts an impairment of goodwill and other intangible assets
amounting to GBP592 million relating to the Armor Holdings Inc.
transaction and specifically the FMTV product line. [Currency conversion: US$ 927.2 million.]
Predictably, Texas politicians were unhappy at the outcome. One “gentleman” from Texas had this to say—
For
nearly two decades, Sealy, Texas, has been the manufacturing home of
the Army’s FMTV truck. There, thousands of proud Texans have
contributed countless hours to the production of world-class vehicles
for our troops, who deserve – and have received – nothing less than the
best. The Army’s decision to discard this important and valuable asset
is ill-informed, and it makes no sense.
Naturally, Oshkosh was “very pleased” by the outcome. Life is sweet in Wisconsin these days, if a bit chilly.
Possible Changes to Business Conduct/Ethics Programs and Related Internal Controls
Most
readers know that in late 2008 the FAR was revised to require
“mandatory disclosure” of suspected employee violations of certain laws
connected with the award or performance of a Federal contract to agency
Inspector Generals. We wrote about the mandatory “contractor
disclosure” program here, and you can visit the Defense Department IG website for such disclosures at this link. Less well known, but just as important, was that the same FAR revisions implemented requirements for “an
effective internal control system” that will—“(A) Establish standards
and procedures to facilitate timely discovery of improper conduct in
connection with Government contracts; and (B) Ensure corrective
measures are promptly instituted and carried out.” (See the contract clause at FAR 52.203-13 (Dec. 2008).)
The
FAR provides details regarding what constitutes an effective ethics
program internal control system, saying that “at a minimum, the
Contractor’s internal control system shall provide for the following:”
- Assignment
of responsibility at a sufficiently high level and adequate resources
to ensure effectiveness of the business ethics awareness and compliance
program and internal control system.
- Reasonable
efforts not to include an individual as a principal, whom due diligence
would have exposed as having engaged in conduct that is in conflict
with the Contractor’s code of business ethics and conduct.
- Periodic
reviews of company business practices, procedures, policies, and
internal controls for compliance with the Contractor’s code of business
ethics and conduct and the special requirements of Government
contracting, including—
o Monitoring and auditing to detect criminal conduct;
o Periodic
evaluation of the effectiveness of the business ethics awareness and
compliance program and internal control system, especially if criminal
conduct has been detected; and
o Periodic
assessment of the risk of criminal conduct, with appropriate steps to
design, implement, or modify the business ethics awareness and
compliance program and the internal control system as necessary to
reduce the risk of criminal conduct identified through this process.
- An
internal reporting mechanism, such as a hotline, which allows for
anonymity or confidentiality, by which employees may report suspected
instances of improper conduct, and instructions that encourage
employees to make such reports.
- Disciplinary action for improper conduct or for failing to take reasonable steps to prevent or detect improper conduct.
- Timely
disclosure, in writing, to the agency OIG, with a copy to the
Contracting Officer, whenever, in connection with the award,
performance, or closeout of any Government contract performed by the
Contractor or a subcontractor thereunder,
the Contractor has credible evidence that a principal, employee, agent,
or subcontractor of the Contractor has committed a violation of Federal
criminal law involving fraud, conflict of interest, bribery, or
gratuity violations found in Title 18 U.S.C. or a violation of the
civil False Claims Act (31 U.S.C. 3729–3733).
- Full cooperation with any Government agencies responsible for audits, investigations, or corrective actions.
Much of the language regarding the elements of an effective ethics program internal control system come from the United States Sentencing Guidelines (USSG) of the United States Sentencing Commission (USSC), as the FAR Councils openly admitted when they promulgated the rules.
So when the USSC proposes revisions to the USSG, it’s worth noting—as
such changes may have downstream impacts to contractors’ internal
control systems.
On
January 21, 2010, the USSC published proposed amendments to the USSG.
The entire set of proposed changes (a lengthy read primarily of interest to attorneys) can be found here. The area of most relevance to this topic is §B2.1. (“Effective Compliance and Ethics Program”). The 2010 proposed amendments in this area include the following sentencing notes—
Both high-level personnel and substantial authority personnel should be aware of the organization’s document retention policies and conform any such policy to meet the goals of an effective compliance program under the guidelines and to reduce the risk of liability under the law (e.g. 18 U.S.C. § 1519; 18 U.S.C. § 1512(c)).
The seventh minimal requirement for an effective compliance and ethics program provides guidance on the reasonable steps that an organization should take after detection of criminal conduct. First, the organization should respond appropriately to the criminal conduct. In the event the criminal conduct has an identifiable victim or victims the organization should take reasonable steps to provide restitution and otherwise remedy the harm resulting from the criminal conduct. Other appropriate responses may include self-reporting, cooperation with authorities, and other forms of remediation. Second, to prevent further similar criminal conduct, the organization should assess the compliance and ethics program and make modifications necessary to ensure the program is more effective. The organization may take the additional step of retaining an independent monitor to ensure adequate assessment and implementation of the modifications.
The nature and operations of the organization with regard to particular ethics and compliance functions. For example, all employees should be aware of the organization’s document retention policies and conform any such policy to meet the goals of an effective compliance program under the guidelines and to reduce the risk of liability under the law (e.g. 18 U.S.C. § 1519; 18 U.S.C. § 1512(c)).
At §BD1.4.
(“Recommended Conditions of Probation – Organizations”), the USSC makes
several policy statements regarding conditions to be imposed on
organizations that are on probation. Among those statements is a
discussion of court-ordered third-party monitors. When a court orders
such a compliance monitor, “The independent corporate monitor must have
appropriate qualifications and no conflict of interest in the case. The
scope of the independent corporate monitor’s role shall be approved by
the court. Compensation to and costs of any independent corporate monitor shall be paid by the organization.”
For organizations on probation, periodic reports must be made to the court. Among other things, those reports “shall
disclose any criminal prosecution, civil litigation, or administrative
proceeding commenced against the organization, or any investigation or
formal inquiry by governmental authorities of which the organization
learned since its last report.” In addition, the organization must
immediately notify the court (or its probation officer) “upon learning
of (A) any material adverse change in its business or financial
condition or prospects, or (B) the commencement of any bankruptcy
proceeding, major civil litigation, criminal prosecution, or
administrative proceeding against the organization, or any
investigation or formal inquiry by governmental authorities regarding the organization.” These organizations must also submit to a “reasonable number of regular or unannounced examinations of facilities.”
The
foregoing may seem a bit onerous, but somebody on TV once said, “Don’t
do the crime if you can’t do the time.” In any case, the foregoing
proposed changes help inform compliance practitioners of the
expectations of the Federal government.
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