On November 2, 2009 the Commission on Wartime Contracting (CwC) held yet another hearing on “contractor accountability” in Iraq and Afghanistan.  The most recent hearing, “Counting Contractors: Where are They and What are They Doing?” was a wide-ranging affair, featuring testimony from the GAO, military services, DCMA, OUSD (AT&L), and DCAA Director April Stephenson.  The CWC divided the hearing into three parts, each with its own panel:  (1) Problems gaining an accurate count of contractor employees supporting the warfighters in Southwest Asia, (2) Managing contractors during the drawdown of forces in Iraq, and (3) DCAA and DCMA “coordination and cooperation.”

With such an embarrassment of riches to write about, we hardly know where to start.  We’re going to focus on just a few aspects of the hearing; the entire cornucopia of testimony can be found here. Our focus will be on the third panel, consisting of Mr. Shay Assad, Director of Defense Procurement and Acquisition Policy (DPAP) for the Office of the Under Secretary of Defense (Acquisition, Technology & Logistics), Mr. Charlie Williams (Director, Defense Contract Management Agency), and Ms. April Stephenson (Director, Defense Contract Audit Agency).  We’ll note for the record (as CWC co-Chair Thibault did) that this would be Ms. Stephenson’s last official testimony before her reassignment to a position on the staff of the Under Secretary of Defense (Comptroller) Robert Hale. We’re focusing on this panel because of the importance of the testimony and its foretelling of impacts that will be felt by all DOD contractors, not just those supporting warfighters in Southwest Asia.  Several bombshells were dropped and we will be quoting extensively from the written testimony.

Co-Chair Thibault (a former long-time employee of the DCAA) noted—

A Commission hearing in August on contractor business systems revealed significant differences between DCMA’s and DCAA’s evaluations and assessments of contractor systems for cost estimating, purchasing, subcontracting, and other functions.  The evidence showed that DCMA frequently took untimely—or no— action on DCAA findings, or issued contrary opinions, and often failed to ensure that contractors took corrective actions for deficiencies.

DOD’s Subcommittee on [Contractor] Business Systems

Mr. Assad started his testimony by noting actions DOD has taken in response to various issues raised by the GAO and others.  In particular, he noted the creation of the Panel on Contracting Integrity and its Subcommittee on Business Systems, which will be chaired by the DPAP Deputy Director for Cost, Pricing, and Finance (Brian George).  Other members of the panel will include the new Director of the DCAA (Pat Fitzgerald), Mr. David Ricci (DCMA), and a “senior representative” from the U.S. Army, and other DOD employees.  According to Mr. Assad’s testimony, “The new subcommittee has a broad mandate to explore issues related to contractor business systems and the roles and responsibilities of DCAA and the DCMA administrative contracting officers (ACO’s) in determining and correcting deficiencies in contractor business systems.” Mr. Assad continued—

Key focus areas for the subcommittee include:

• Clearly defining the roles and responsibilities of the DCMA contracting officer and DCAA auditor in determining the adequacy of contractor business systems;
• Assessing the need for standards, such as those already published for Earned Value Management System (EVMS), for the various business systems;
• Recommending procedures for higher level adjudication of differences between audit recommendations and the DCMA contracting officer determinations of adequacy; and
• Recommending appropriate contract remedies that DCMA contracting officers can use when a business system has been determined to be deficient.

The subcommittee will review current policy, processes, and practices within the DoD regarding the audit, evaluation, and administration of contractor’s business systems to include contractor internal control systems or other contractor systems the subcommittee may identify. In order to ensure consistency in the Department’s oversight of contractor business systems, the subcommittee will examine the need to establish a “common list” of contractor business systems with defined expectations or criteria for each system to determine adequacy. In addition to establishing a common set of standards for measuring the adequacy of contractor business systems, the subcommittee will determine the need for additional contract clauses or regulations for each system to include remedies such as withholds and guidelines for audit frequency. Currently, contractor business systems are not specifically defined in our regulations. We expect the work of the subcommittee will result in recommendations for new regulatory language in the Federal Acquisition Regulations (FAR) or the Defense FAR Supplement (DFARS). For example, the DFARS may need to be revised to prescribe roles and responsibilities and standards that will be employed to determine compliance. I expect the subcommittee will be examining the existing FAR and DFARS contract clauses used for enforcement and remedies for non-compliance.

Mr. Assad continued in a like vein, discussing an adjudication process to be used when DCAA auditors and DCMA contracting officers disagree on how to evaluate a contractor’s business system.  Moreover, Mr. Assad testified that “Audits of contractor business systems comprise only 5 % of DCAA’s audit workload based on 2009 incurred hours, which also include CAS non-compliances, and cost proposals for cost impacts, indirect rates, forwarding pricing rates, and other contract negotiations or awards. We will be working with DCAA to determine if some work currently being performed by DCAA could be performed by others or if the priority for some reviews should be lowered until additional resources can be made available.”

Mr. Assad also testified that –

The subcommittee will also focus on the type of input the DCMA contracting officer needs from DCAA in order to make decisions regarding adequacy of contractor business systems. We know for certain that DCMA contracting officers need to know the specific deficiencies in contractor business systems and the significance of those deficiencies on defense contracts. One approach that is under consideration is having DCAA report on the materiality of the deficiency it finds instead of opining on the overall system. That would enable DCMA contracting officers to use audit reports to determine what needs to be corrected and the degree of risk the deficiency imposes on the government.

He concluded his testimony by discussing the “chronically short staffed” agencies and how the lack of resources has impacted both DCAA and DCMA.  He testified that “Until the staffing issues are resolved, it will not be possible for DCAA to perform at the level of quality and efficiency that is desired.”

DCMA Initiatives

Next Mr. Williams spoke to the CWC, testifying “I fully support guidance and regulatory changes in this area and believe the entire DoD procurement community needs to work together to send a clear message of compliance and accountability to contractors.” He also offered the following initiatives that DCMA is currently pursuing:

• We plan to expand the DCMA Contractor Purchasing System Review Center that over the next two years will triple the size of that organization as well as provide for additional managerial oversight of its operations. This expansion is planned to increase our ability to accomplish our reviews more frequently, and not because the reviews have been found inadequate. Further, when we are aware of issues with a certain contractor, this will provide us the capacity to expand the scope of our reviews.
• We are implementing a stronger set of internal controls through establishment of a “Board of Review” process. This process … mandates that any determination inconsistent with DCAA recommendations is subject to a higher level review within DCMA.  Complementing this is an Office of the Secretary of Defense policy currently being coordinated that provides a process for resolving contracting officer disagreement with DCAA audit findings.
• We are developing a quality assurance plan for the resolution and disposition of reportable audit findings. It is unacceptable to me that we do not accomplish timely follow-up. This plan will ensure appropriate and timely administrative contracting officer resolution and disposition of reportable audit findings and employee and contract leadership accountability.
• We are establishing a Cost and Pricing Center primarily responsible for forward pricing and indirect cost issues, and proposal and data analysis. The Center will serve as a repository for cost and pricing data across the Department of Defense and conduct special cost reviews for the DoD enterprise. It will centrally manage the recruitment and education of cost monitors and price analysts across the Agency. The Center efforts will increase accountability for accuracy and predictability of rates, improve business base forecasting, and reduce the backlog of final overhead rate settlements, cost accounting standards issues and other reportable audits.

Last to speak was Ms. Stephenson.  In her testimony she focused first on alleged misbilling by KBR of at least $20 million (and perhaps as much as $400 million) in private security costs under its LOGCAP III contract.  This issue is currently in litigation, as KBR filed an appeal with the Armed Services Board of Contract Appeals (ASBCA) over the matter.  She also accused KBR of failing to drawdown its support staff in levels commensurate with the military force drawdown.  (We note that the CWC itself predicted that contractor support levels would actually increase as military forces decreased.) Ms. Stephenson asserted that KBR’s “excessive” staff levels would result in $193 million in “excessive costs” that would be paid by the U.S. Government.

Important Changes in DCAA’s Approach to Auditing Contractor Internal Controls

Ms. Stephenson also discussed the controversial approach DCAA has recently taken with respect to its audit of contractor internal control systems.  She testified—

Based on our analysis of the relevant auditing standards, we determined that DCAA is not required to audit and report on the overall adequacy of the contractor’s system and related internal controls. We believe reporting significant deficiencies/material weaknesses on contractors’ various subsystems comprising the overall accounting system (e.g., billing, purchasing), as opposed to an overall audit opinion on the adequacy of each of those systems, may be a better approach because it would place the focus on the significant deficiencies/ material weaknesses instead of the contractor’s system as a whole. This revised audit approach would eliminate the concerns of a pass/fail rating as was raised at the hearing in August. We believe this audit approach would help DCMA and DCAA work together to ensure the contractor takes the appropriate corrective actions. [But] until we have completed this assessment, we will continue to issue audit reports on internal controls with two opinions – adequate and inadequate. We believe it would be counter-productive to revise the process for a month or two and then revise it again at the end of the calendar year when we complete our analysis of the revised auditing process and procedures.  To ensure our FY 2010 audits of contractor business systems reflects the revised audit process, no new internal control audits will be started until the revised audit process is tested and distributed to the field audit offices.

Ms. Stephenson closed with the following statement: “DCAA will continue to work closely with all acquisition organizations to promote an integrated, well-managed contract audit process in-theatre. I believe Mr. Assad’s establishment of the new subcommittee is a positive step to improving the oversight of contractor systems.” Although we have in the past disagreed (rather vehemently) with her posture on various audit issues, we wish her well in her new assignment.

In conclusion, we believe the testimony proffered to the CWC by the third panel offered a bit of hope for DOD contractors while threatening them in a number of areas.  We recommend that the testimony of each of the three speakers (to which we have linked) be reviewed in detail, and that contractors brace for a reinvigorated focus on internal control systems.  We look forward to elimination of the current binary pass/fail overall assessment, where every mistake is deemed a significant system deficiency.  However, the penalty for inadequate control systems is likely to increase in the near future, and may include imposition of significant monetary penalties.

On October 29, 2009 the Government Accountability Office (GAO) issued a report entitled, “DEFENSE ACQUISITIONS: Challenges in Aligning Space System Components” (GAO-10-55).  The report surveyed 8 DOD satellite programs with aggregate total mission costs currently expected to exceed $50 billion. The DOD satellite programs in the GAO study were:  Advanced Extremely High Frequency (AEHF) Satellite, Mobile User Objective System (MUOS), Wideband Global SATCOM (WGS), Space-Based Infrared System (SBIRS), Space Tracking and Surveillance System (STSS), NAVSTAR Global Positioning System (GPS), Space-based Space Surveillance (SBSS), and National Polar-orbiting Operational Environmental Satellite System (NPOESS).

The table below summarizes the programs and the dollars associated with each.

DOD satellite systems typically have up to three main components:  (1) satellites, (2) ground control systems, and (3) user terminals. According to GAO, ground control systems are generally used to download and process data from satellite sensors (and disseminate this information to warfighters and other users), and to maintain the health and status of the satellites (including steering the satellites and ensuring that they stay in assigned orbits).  User terminals are typically procured by the military services and managed separately from associated satellites and ground control systems; they can range from equipment hosted on backpacks to terminals mounted on Humvees, airborne assets, or ships.  Terminals can be used to help the warfighter determine longitude, latitude, and altitude via GPS satellites, or securely communicate with others via AEHF satellites. The GAO study focused on how DOD aligns (or fails to align) development and operational capability of each of those components, in order to maximize satellite utilization and deliver maximum capability to the warfighters.

GAO found that “for six of DOD’s eight major space system acquisitions, DOD has not been able to align delivery of space assets with ground assets, user assets, or both.… For the five space systems requiring user terminals, none were aligned. In some cases, capability gaps resulting from delays in the fielding of ground control systems or user terminals are 4 or more years.”

Unlike many GAO reports we have reviewed, in this one GAO took pains to provide context for its findings, stating—

Notwithstanding the fact that alignment gaps are undesirable, several factors provide insight into the inherent challenges associated with managing alignment. First, alignment may be relatively easier to achieve in some programs than in others. For example, some space systems may require only a ground system or few user terminals and may even manage these acquisitions within one organization. By contrast, other programs may require literally tens of thousands of terminals that must be installed on a wide span of weapon systems, including ships, planes, vehicles, and even other space systems—which are owned and controlled by various military services. Second, an inherent difficulty in aligning satellite launches with ground and user terminal programs is the lead time needed to schedule satellite launches—about 2 years—which makes it difficult to hold back satellite deployment if a ground or user terminal is experiencing a considerable delay…. Third, it is difficult to measure the extent to which warfighters and other users are being affected by delayed capability or even the extent to which capability is delayed. … satellites themselves only offer initial capabilities until enough satellites have been launched to provide the coverage needed to achieve full capability.  This process alone can take years and will vary system to system as the number of satellites required to achieve full operational capability depends on mission requirements and coverage offered by satellites, among other factors.  At the same time, ground control systems can be delivered in phases, the first of which may focus solely on controlling and maintaining the health of the satellite, with subsequent phases delivering software that can collect and process sensor data. User terminals can take years to install as they can span a broad spectrum of weapon systems and their installation is usually done alongside other upgrades.

GAO commented on individual satellite programs—

• GPS achieved full operational capability in 1995…. However, the plan and the capabilities it is being designed to provide have been delayed and are significantly over budget. As a result, some new capabilities are not now available to the warfighter because the ground control system features needed to command and operate the capabilities have not been completely delivered. For example, updated user equipment possessing a capability to prevent spoofing of navigation information started being delivered to the warfighter in 2004. However, the Architecture Evolution Plan, representing the current ground control system, is not capable of providing two important aspects of this capability and is not expected to do so until early fiscal year 2010.

• The first SBIRS satellite5 will carry scanning and staring sensors designed to provide early missile warning capabilities. However, DOD will not be able to fully utilize the data collected from the staring sensor when this first satellite launches, currently planned for September 2010, because the ground control software that is to process the sensor’s data is not planned to be fully functional until at least 2014. This means that complete, usable data from the staring sensor will not be available until about 4 years after the satellite is on orbit.

• The first WGS satellite launched in October 2007, but its associated ground mission planning software—the Consolidated Network Planning Software—does not work properly. This planning software was designed to compute required bandwidth for all users simultaneously accessing WGS satellites. It would then disseminate that information to various satellite operation and support stations located globally so that all stations had a real-time view of the availability of WGS satellite capabilities. However, because the development of the mission planning software has had problems and is not well coordinated with WGS satellite capability, the dissemination of information does not occur as designed, and the information has to go through a time-consuming and labor-intensive work-around through a single ground station before it reaches the warfighter.

GAO commented on alignment of user terminals as follows—

• The Air Force’s FAB-T program is designed to provide antijam and protected communications for nuclear and conventional forces as well as many airborne assets and ground command posts. As one of the primary user terminal programs associated with AEHF, FAB-T has recently experienced numerous problems and is not currently aligned with the AEHF satellite program. Specifically, contractor performance problems, which caused design teams to be restructured to improve performance and efficiency, caused a delay in the start of initial production from fiscal year 2007 to fiscal year 2010. In addition, design changes and contract cost growth have more than tripled development costs since the contract was first awarded. While AEHF will be able to provide capability through other user terminals, current estimates show that FAB-T will only have 2 percent of its terminals fielded when AEHF is scheduled to reach its initial operating capability in 2011. Further, estimates are that FAB-T will not have all of its terminals fielded until fiscal year 2019.

• JTRS is a family of interoperable, digital, modular, and software-defined radios that is planned to provide the capability to receive, transmit, and relay voice, data, and video. In the past, tactical military radios could not work well with each other. The JTRS radio is also being designed as the primary user terminal for the new MUOS satellite capability to help the warfighter achieve information superiority. Although MUOS will be able to provide capability through other, legacy user terminals, DOD estimates that less than 20 percent of JTRS terminals will be available to access the MUOS satellite when it achieves operational on-orbit capability in December 2011. In 2014, when MUOS is expected to reach full operational capability, 32 percent of JTRS terminals are expected to be available to the warfighter. DOD expects to field all the needed JTRS terminals by 2021—about 7 years after MUOS is expected to be fully operational. … Officials from one warfighting command (users of the capability) told us that because of the 2-year gap between when all MUOS satellites reach on-orbit capability and when the MUOS-capable user terminals (JTRS) first become available, the MUOS satellites will have spent a portion of their expected lifespan less than fully utilized. This issue concerns the combatant command because MUOS is replacing the aging Ultra High Frequency Follow-On space system, which currently serves more military customers than it was originally designed to handle. While waiting for the JTRS capability, the command will likely have to lease commercial satellite capability and user terminals to increase bandwidth capacity and improve the speed and effectiveness of information and communication transfers.

GAO summed up other problems.  We report them here verbatim because of the potential to learn lessons from them.

The satellite, ground system, and user terminal programs we studied have had execution problems that have caused substantial delays in schedule that in turn have made it more difficult to align delivery of all three space system components. Most prominent are requirements changes, technical problems resulting from underestimation of complexity, and poor contractor oversight. The first satellite delivery of SBIRS, for instance, has been delayed at least 7 years in part because of poor oversight, technical complexities, and rework. The first satellite delivery for NPOESS is over 4 years late. AEHF has experienced delays of about 3 years for these reasons along with requirements changes that occurred earlier in the program and difficulties meeting information assurance requirements for its satellite. The GPS IIF system has also had about a 3-year delay because of technical and workmanship problems and requirements changes. Ground systems and user terminals have experienced similar problems. JTRS, for example, has experienced significant delays because of problems in maturing critical technologies, and as noted earlier, FAB-T delays have occurred because of contractor performance problems. Also, as noted earlier, the WGS ground system has experienced technical problems that have prevented it from working properly with WGS satellites now in orbit.

*****

Underestimating software complexity has also been a problem. The complexity of software on any system, including space systems, is often denoted by the amount of software, or number of lines of software code. Generally, the greater the number of lines of code, the more complicated the software system development, and ground control systems typically require significantly more software than the satellites. This means that software development for ground control systems is oftentimes the higher risk. In some cases, unanticipated software complexity can lead to lack of synchronization between the satellite and ground systems of space system acquisitions. For example, on the AEHF space system, the prime contractor has experienced quality control problems with the software for the mission planning element of the ground control system. In testing so far, the government has identified numerous significant software deficiencies and continues to find deficiencies as testing continues. Ground control system fielding will be delayed until the deficiencies are corrected. Also, our past work has shown that the MUOS ground control software represented one of the greatest risks to the program because of the size and complexity of the design. On SBIRS, the total estimated lines of code on the ground control system software grew from approximately 1.55 million in August 2004 to approximately 1.88 million in December 2008.

*****

Space system acquisition programs sometimes shift funds from the development of ground control systems to their associated satellite development efforts to meet unexpected obstacles—an action that can create new problems. For example, when the GPS IIF satellite program encountered development problems, the program shifted funds set aside for the GPS ground control system to address the satellite problems, causing a delay in the delivery of some ground control capabilities. Similarly, SBIRS officials reallocated funding from the ground control system to address satellite software issues, which may have contributed to the system’s initial inability to utilize the staring sensor data from the first geosynchronous earth orbit satellite. Program officials told us that they like the flexibility of being able to move funds from ground control systems to the satellites if priorities warrant. However, as we indicated above, this can put the development of ground control systems at a disadvantage compared to development of the satellites for space systems, for example, GPS and SBIRS.

We don’t have much to add to GAO’s insights.  We continue to be proud of America’s technological prowess and worried about the apparent lack of management oversight given to DOD’s satellite programs.  These are important—critical—space systems, and it is important that they be given appropriate attention by the various stakeholders.  See the entire 37 page GAO report here.