On October 27, 2009 the OMB issued new guidance to Federal agencies designed to help them implement a previously issued directive to “reduce by at least 10 percent the combined share of dollars obligated through new contracts in FY 2010 that are: (1) awarded non-competitively and/or receive only one bid in response to a solicitation or a request for quote, (2) cost-reimbursement contracts, or (2) T&M/LH contracts.” The new guidance consists of “guidelines to help [agencies] evaluate the effectiveness of their competition practices and processes for selecting contract types.”  The guidelines consist of three questions and a set of considerations for addressing each question.

Generally, the guidelines and considerations are a combination of common sense and fundamental best practices.  For example, one consideration calls for agencies to “focus on requirements development and outreach to vendors” in order to maximize the effective use of competition.  In order to choose the best contract type for an acquisition, agencies are encouraged to “determine the level of uncertainty” and to “use incentives to motivate lower costs with improved delivery or technical performance and to discourage contractor inefficiency and waste.”

That said, other aspects of the guidance are worth noting.  For instance, contract risk can be limited in noncompetitive situations by limiting contract length and regularly assess contractor performance.  The guidance encourages use of “contract review boards, peer reviews, or contract type advocates” to help transition from flexibly priced contract types to “lower risk” contract types.

An interesting (and perhaps controversial) aspect of the guidance encourages agencies to use “hybrid contracts” in order to better match requirements and pricing.  Hybrid contracts contain Contract Line Item Numbers (CLINs) or Task Ordering procedures that permit different contract types to be used for different aspects of the work.  As the guidance notes, “Work for which there is a basis for firm pricing can be awarded for a firm-fixed price while requirements for which there remains considerable uncertainty can be acquired on a cost or T&M/LH basis.”  One potential problem with this approach is that the contract’s price is unknown at the time of award and, because the price is unknown it may be unclear whether the contract is subject to Cost Accounting Standards (CAS) or not.  In addition, the potential for multiple contract types increases uncertainty—i.e., risk—and makes it difficult for a contractor to price.

The guidance offers an alternative approach:  “an agency could competitively award a series of contracts addressing smaller increments or modules of work.” This alternative is not very appealing, given the cost and schedule impacts associated with the current contract award process.

In summary, we would file the guidance under “motherhood and apple pie” in the binder on the bookshelf.  There are some small nuggets of wisdom, and a few clunkers—but the majority of the “guidance” breaks no new ground.

See the new OMB guidance here.

Post Script:  GovExec.com reported in this story that the Senate on Homeland Security and Governmental Affairs (from whom we heard much on the DCAA audit quality issue) held a hearing on October 28, 2009 in which “lawmakers from both sides of the aisle expressed concerns about the Obama administration's new contracting guidance….”  The article reported that Senator Claire McCaskill (D-MO) had “serious concerns” and “significant problems” with the OMB guidance, among which were “a lack of concrete direction on how agencies should achieve necessary reforms to improve procurement” and a failure “to hold agencies accountable for reforms by setting concrete deadlines.”  The article quotes Senator McCaskill as saying that the guidance "lacks adequate analysis and substance in my view.  It really is boiler plate -- it's standard material, it reiterates a list of human capital planning guidelines, it creates various interagency working groups. I'm tired of studies, I'm tired of working groups, I want to see action and in my view this plan simply delegates to each agency what the law required OFPP to do itself."

Documents associated with the Senate hearing are linked.  Senator McCaskill’s opening statement can be found at the hearing site, or here.

On October 26, 2009 DCAA Director April Stephenson transmitted an email from Under Secretary of Defense (Comptroller) Mr. Robert Hale to all DCAA employees, announcing that she was leaving the agency she had helmed for 21 months, in order to accept “reassignment to an SES [Senior Executive Service] position” on Mr. Hale’s staff, effective November 8, 2009.  Replacing Ms. Stephenson will be Mr. Pat Fitzgerald, currently the Auditor General of the U.S. Army.  In making the announcement, Mr. Hale wrote:

DCAA remains a critical part of the acquisition process. The strong and capable staff at DCAA, coupled with hard work from all of you, helps DoDacquire the best goods and services for our warfighters at reasonable prices. We must carefully address the concerns raised about DCAA in recent reports issued by the GAO and the DoDIG. I want to work with Mr. Fitzgerald and the Agency's employees to address those concerns in ways thatstrengthen the organization and permit it to continue performing its important role.

In her transmittal, Ms. Stephenson wrote:

I would like to take this opportunity to thank the employees of DCAA for
their tireless efforts in auditing contractor costs. … Without the efforts of all DCAA employees, billions of dollars of contractor overpayments and unallowable costs would go undetected.  FY 2009 was a challenging year with the implementation of many improvements across the Agency. I appreciate the dedication and can-do attitude of the DCAA workforce. The many employee suggestions received throughout the year were essential in developing new initiatives and refining prior processes. Although I will be moving on to new challenges, the employees of DCAA will always be in my heart.

The move was not entirely unexpected.  Followers of this site are aware of the intense barrage of criticism Ms. Stephenson and the DCAA have received over the past 15 months.  Candidly, much of the criticism was misdirected, and in any case focused on issues that occurred literally years before Ms. Stephenson took over as Director, replacing Bill Reed, who had led the agency for more than 20 years.  While there is certainly much to criticize regarding DCAA audit quality, surprisingly little attention was paid to the audit process that leads, time after time, to protracted disputes between the Defense Department and its contractors.  We offered some suggestions as “lessons learned” here.

FederalTimes.com reported that Navy Commander Darryn James, DOD spokesperson, stated that the change is being made “because DoD leaders feel he [Fitzgerald] is the best-qualified person to continue making improvements at DCAA. This reassignment is intended to bring in a new leader at DCAA, with a fresh perspective and ideas.”

According to the FederalTimes.com article, Senator Joe Lieberman issued a statement in which he said: “I hope that the DoD comptroller as well as the incoming DCAA director will continue to bring outside auditing expertise into the agency, strengthen quality control, improve training at all levels of DCAA, and prioritize audits based on the risk of contractor over-billings as well as waste, fraud and abuse.”

So who is Mr. Patrick Fitzgerald?  Currently, he leads the U.S. Army Audit Agency, established in 1946 to perform “auditing services on an Army-wide basis within the zone of the interior, including the civil appropriations of the War Department.”  In 1947, “War Department General Order Number 83 stipulated that the Army Audit Agency was responsible for both the operational performance and technical supervision of audits within the zone of the interior. General Order No. 83 further stated that the Army Audit Agency was charged with the technical supervision of audit operations in oversea commands.”  Currently, the Army Audit Agency’s staff of 600 “is organized into 17 functional audit teams and 6 smaller divisions” and includes 23 field offices, 3 overseas offices, and an operations center in Alexandria, Virginia.  In a nutshell, the USAAA is the Army’s internal audit team.

Mr. Fitzgerald will face some immediate challenges, not the least of which is ramping up from managing a staff of 600 to managing a growing staff of 4,200.  There is also the issue of managing the expectations of multiple customers.  Instead of focusing solely on meeting the needs of the Army, DCAA has to meet the needs of a diverse set of stakeholders, including those from all military services as well as several from outside the Defense Department.  Nonetheless, Mr. Fitzgerald has a running start, as he has been leading the DCAA Oversight Committee tasked with overseeing DCAA remedial management actions taken in response to the scathing July 2008 GAO report that first brought the audit agency’s shortcomings to the public’s eye. As Mr. Hale testified before the Senate Committee on Homeland Security and Governmental Affairs, “The committee is made up of the Auditors General of the Army, Navy, and Air Force; the Director of Defense Procurement and Acquisition Policy (DPAP); and the DoD Deputy General Counsel for Acquisition and Technology. This senior group will assess DCAA’s activities and the actions taken to correct problems identified by GAO and others.”

The Project on Government Oversight (POGO) opined that removing Ms. Stephenson “won’t fix the Agency’s problems.”  POGO quickly released the following statement:

Contractors have been on a rampage fighting new requirements being placed upon them by DCAA for the past year. Removing the Director of DCAA does not address congressional and taxpayer concerns that this agency lacks the independence and clout necessary to serve taxpayer interests. It would be unfortunate and ironic if congressional inquiries into the independence and strength of DCAA ultimately serves to strengthen the hand of contractors.

An article on GovExec.com quoted POGO’s Executive Director as saying, “"I think this is a mistake.  I don't think April was the problem.  Removing the director of DCAA does not address congressional and taxpayer concerns that this agency lacks the independence and clout necessary to serve taxpayer interests.  It would be unfortunate and ironic if congressional inquiries into the independence and strength of DCAA ultimately serves to strengthen the hand of contractors.”

In our view, Ms. Stephenson inherited an intractable set of problems from her predecessor, not the least of which was a dysfunctional management culture and a “check the box” audit mentality that penalized auditors for thoroughness at the same time it failed to penalize them for obvious quality problems.  She had the helm of the ship for 21 months, however; and at some point it became her watch and her problem to solve.  It became her management team and it became about her ability to empower the staff to excellence.  But rather than making the fundamental changes necessary to address the root causes of the audit agency’s problems, she chose to focus instead on attacking DCMA contracting officers and DOD contractors, blaming them for many of the problems she faced.  The audit guidance issued under her leadership was tainted with an air of draconian arbitrariness—to the point that even the audit supervisors in the field were uncomfortable implementing it.  While Mr. Fitzgerald faces many of the same issues Ms. Stephenson faced, as an outsider he is beholden to nobody in the current management team and thus has the ability to make wholesale changes, if he wishes to do so.  Moreover, one would suppose he has the backing of Under Secretary Hale—and perhaps Defense Procurement and Acquisition Policy Director Shay Assad—so he should have the clout to implement the necessary changes that will return DCAA to its former position as the preeminent Government audit agency.