DOD Prepares for Pandemic by Telling Contractors They Better Not Get Sick
"I have an eye infection and I can't see the point of coming into work today." -- Anonymous Employee
On August 27, 2009 the Department of Defense (DOD) issued another DFARS Class Deviation--this time in recognition of the "changing environment" and the "increased need for continuity of operations capabilities and plans that enable agencies to continue their essential functions across a broad spectrum of emergencies ... [including] the 2009 H1N1 influenza pandemic." This latest Class Deviation creates solicitation and contract clauses that put contractors on notice that, even in the midst of national emergencies, the DOD expects them to show up for work. The Class Deviation acknowledges that various contract clauses, including the "excusable delays" and "termination for default" clauses, generally relieve contractors from liability when a failure to perform arises from causes beyond their control. However, the document then states that, regardless of those legal niceties, "contractors providing services designated as essential contractor services by a DOD component are 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." The document defines "essential contractor services" as contractor-provided services that support DOD mission critical functions, "such as support of vital systems, including ships owned, leased, or operated in support of military missions or roles at sea; associated support activities, including installation, garrison, and base support services; and similar services provided to foreign military sales [FMS] customers under the Security Assistance Program." The document goes on to say that "Services are essential if the effectiveness of defense systems or operations may be seriously impaired by the interruption of these services." Further, the document defines "mission essential functions" as "those organizational activities that must be performed under all circumstances to achieve DOD component missions or responsibilities." The new contract clause, "Continuation of Essential Contractor Services" (AUG 2009), notifies contractors that some or all of the services performed under the contract are essential services . It requires the contractor to have a plan to ensure continued performance of the services during a crisis. In its plan, the contractor must identify provisions for "acquisition of necessary personnel and resources ... for continuity of operations up to 30 days, or until normal operations can be resumed." In the event the contractor cannot perform the services, the clause requires Government notification "as expeditiously as possible" and full efforts to cooperate with the Government's efforts to maintain continuity of operations. In crisis situations, the clause permits the Government to use Federal employees of other agencies or "contract support from other contractors or to enter into new contracts for essential contractor services." Finally, the clause must be flowed-down to all subcontracts for essential services. Well, what is one to make of the foregoing? On one hand, the DOD should be commended for proactively preparing for possible emergencies, such as the H1N1 pandemic. And it is a good idea to require contractors to begin planning and preparation for workforce management and mobilization during times of crisis. On the other hand, contractors will incur costs in developing their plans, and will expect to receive reimbursement for such costs from the DOD. Moreover, it is interesting that DOD expects contractors to support foreign governments (who are acquiring services via FMS contracts) in such emergency situations. Finally, 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. And what is the remedy for a contractor who breaches its contract by failing to exercise its best efforts to support essential DOD (or foreign government) services? The obvious remedy would seem to be a termination for default (T4D); however, as the Class Deviation itself notes, contractual T4D clauses generally relieve contractors of their duty to perform when the failure arises from causes beyond their control (e.g., pandemics). Thus, it is unclear if the DOD has any remedy other than to note the lack of performance and ensure that lack is input into the contractor past performance database. See the class deviation here.
Mandatory Disclosure Program, Six Months Later
In December 2008 the Federal Acquisition Regulation (FAR) was revised to require contractors to report to the GSA and/or DOD Inspectors General any "credible evidence" that an employee had violated statutes or regulations related to contract fraud, bribery, acceptance of gratuities, conflicts of interest, or submission of false claims. Failure to report can lead to suspension or debarment from Federal contracting. In addition, the new rule established requirements for contractor ethics programs and for controls related to investigations and reporting of wrongdoing. On August 27, 2009 GovExec.com carried a report on the status of the new mandatory contractor disclosure rule. The article stated that the DOD IG has received 56 reports from contractors, but fewer than 10 of those disclosures have been referred to investigative agencies--meaning that the vast majority of them have been resolved administratively, the same as they would have been before imposition of the new rules. The article quotes Lynn McCormick (manager of the new disclosure program) as saying that most of the disclosures have been related to inaccurate labor charging. The article quotes Ms. McCormick's supervisor as saying, "The preponderance have been related to single employee misconduct, say where someone was found not to have shown up to work or to have erroneously billed to one contract instead of another or the employee was found surfing the Internet for three or four hours a day for the last three months, or something like that. So they have to adjust the billing in order to credit the government back for that employee's labor time." Because of the volume of the disclosures, the DOD IG has had to add staff in order to ensure that Government stakeholders, including Department of Justice Attorneys as well as the various DOD buying agencies and contract administration offices, are properly briefed and agree to the proposed disposition of each disclosure. In sum, the first six months seem to indicate a trend where contractors are erring on the side of caution by disclosing every small transgression, even those that would normally be handled administratively. The IGs are receiving the disclosures and adjudicating each one through coordination with numerous Government stakeholders. The vast majority of disclosed matters is being handled administratively, just as they would have been before the new rule took effect. The only difference is, now the contractors are spending more to disclose the issues and DOD IG is spending more to process them. As is often the case, the only winners seem to be the attorneys involved in the process.
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Head of Boeing Commercial Aircraft Latest Casualty in Dreamliner Drama
 On August 31, 2009 Boeing announced the retirement of Scott Carson, President of Boeing Commercial Aircraft (BCA). Mr. Carson will be replaced by Jim Albaugh, the current President of Boeing's Integrated Defense Systems (IDS). Mr. Dennis Muilenberg will succeed Mr. Albaugh as President of IDS. This executive shuffle is the latest move in the nearly three-year year struggle to capitalize on delays in the Airbus A380 program.
Mr. Carson's three-year tenure at BCA was marked by program setbacks in both the 747-8 and 787 "Dreamliner" programs. In September 2007, Boeing announced a three-month delay to the Dreamliner program, blaming both a shortage of aerospace fastners as well as incomplete software. One month later, the company announced a further three-month delay to flight testing as well as a six-month delay to aircraft deliveries, this time blaming "traveled work" -- work that suppliers had failed to accomplish. In April 2008, Boeing announced another 15-month delay to aircraft deliveries. In November 2008, yet another delay was announced, this time due to incorrectly installed fastners and the recent machinists' strike. In December 2008, Boeing announced a further delay to test flights, this time for another six-month period. In May 2009, Boeing announced a further slip to delivery schedules of another six months, because of delays in ramping up production. On June 15, 2009 Boeing announced that the 787 would make its first flight in two weeks; however, on June 23rd the company announced a postponement of the first flight "due to a need to reinforce an area within the side-of-body section of the aircraft." According to a July 30, 2009 Seattle Times report, the wing structural problem was worse than stated in the company's June 23rd press release. Boeing's customers are reported to be "dismayed" by the continued schedule slippages.
What makes the Dreamliner so interesting is that it marked Boeing's attempt to develop a new method of supply chain management. According to Wikipedia,
Boeing manufactures the 787's tail fin at its plant in Frederickson, Washington, the ailerons and flaps at Boeing Australia, and fairings at Boeing Canada Technology. This was a new and daring step for Boeing, which has historically guarded its techniques for designing and mass producing commercial jetliner wings. ... the wings are manufactured by Japanese companies in Nagoya such as Mitsubishi Heavy Industries, which also makes the central wing box. The horizontal stabilizers are manufactured by Alenia Aeronautica in Italy; and the fuselage sections by Global Aeronautica and Boeing Charleston in Charleston, South Carolina (USA), Kawasaki Heavy Industries in Japan and Spirit AeroSystems, in Wichita, Kansas (USA).
The passenger doors are made by Latécoère (France), and the cargo doors, access doors, and crew escape door are made by Saab (Sweden). Japanese industrial participation is very important to the project, with a 35% work share, and many of the subcontractors supported and funded by the Japanese government. On April 26, 2006, Japanese manufacturer Toray Industries and Boeing announced a production agreement involving $6 billion worth of carbon fiber. ... On February 6, 2008, TAL Manufacturing Solutions Limited, a subsidiary of the Tata Group (India) announced a deal to deliver floor beams for the 787 from their factory at Mihan, near Nagpur, India to assembly plants in Italy, Japan and the United States.
Messier-Dowty (France) builds the landing gear, which includes titanium forged in Russia, and brake parts from Italy, and Thales supplies the integrated standby flight display and electrical power conversion system. Honeywell and Rockwell-Collins provide flight control, guidance, and other avionics systems, including standard dual head up guidance systems. Future integration of forward-looking infrared is being considered by Flight Dynamics allowing improved visibility using thermal sensing as part of the HUD system, allowing pilots to "see" through the clouds. Connecticut (USA)-based Hamilton Sundstrand provides power distribution and management systems for the aircraft, including manufacture and production of Generator Control Units (GCUs) as well as integration of power transfer systems that can move power from the Auxiliary Power Unit (APU) and the main engines to the necessary parts and machinery of the aircraft. Cold weather test of the APU took place in Alaska.
Boeing's supply chain management situation has been called a "nightmare". Although recent reports indicate that Boeing has belatedly developed innovative program management techniques to manage its far-flung suppliers-- including use of hand-held video cameras from shop floors to assess real-time production progress and extensive use of web-based conferencing from a Command Center that operates 24 hours a day. These innovations came too late, apparently, to save Mr. Carson.
In a late-breaking addition to this article, on September 2, 2009 TheStreet.com carried a brief story. Following is an exact quote of that story.
"Boeing Co. CEO Jim McNerney told an investors' conference Wednesday that the company 'lost the handle a little bit' in managing the 787 program. But Jim Albaugh, the newly appointed chief of the commercial airplane division, 'has been managing hundreds of programs for the last eight years,' McNerney said, promising improved execution in the 787 program."
It may now be said that "lost the handle a little bit" can join "hiking the Appalachian Trail" in the 2009 list of euphemisms.
New DCAA Audit Guidance Underscores Need for Lean Proposal Preparation Processes
When thinking of Lean principles (which is the common name for the principles of the Toyota Production System), most people think of single-piece manufacturing flow and continuous improvement of manufacturing processes. Other people realize that Lean can be applied to other back-office processes such as accounting and finance. Still others are considering how Lean can be applied to program management and supply chain management. We’ve yet to see Lean applied to proposal preparation, even though everybody agrees that the existing processes take too long and cost too much. Recent DCAA audit guidance that directs auditors to question (as being unsupported) subcontractor bids for which the higher-tier contractor fails to perform cost and price analysis underscore the need to apply Lean principles to the proposal preparation process—particularly with regard to managing subcontractor bids. Performing Cost and Price Analysis on Subcontractor Proposals FAR 15.404-3(b) requires that a prime contractor perform cost or price analysis on proposals received from prospective subcontractors in order to establish that the subcontractors’ proposed prices are reasonable in amount. Price analysis is the process of examining and evaluating a proposed price without separating evaluating individual cost elements and proposed profit/fee amounts. There are different price analysis techniques available; however, most involve comparison of the proposed price with another price, generally through obtaining competition. In contrast, cost analysis is the review and evaluation of separate cost elements and proposed profit/fee in an offeror’s proposed price, and the use of judgment to determine how well the proposed costs represent what the contract costs should be, assuming reasonable economy and efficiency. It is focused on a single bid. Generally, this effort involves examination of “cost or pricing data” or “information other than cost or pricing data”. “Cost or pricing data” is a term of art, defined at FAR 2.101, and indicates that the offeror is under a duty to disclose all relevant facts and verifiable data, as required by the Truth-in-Negotiation Act (TINA). A prime contractor whose proposal is subject to TINA requirements may also have to submit its analyses of the subcontractors’ cost or pricing data as part of its cost or pricing data submission – meaning that there may be three sets of data to which it is certifying under TINA: (1) its own cost or pricing data, (2) the subcontractors’ cost or pricing data, and (3) its analyses of the subcontractors’ cost or pricing data. That’s quite a bit to keep track of. It’s also quite a bit to evaluate, assess, and certify to. As part of the prime’s proposal process, it must determine which aspects of the work will be subcontracted (via a make-or-buy analysis), tell the subcontractors what they should propose on (and either obtain competition for price analysis or obtain sufficient data for cost analysis), determine which subcontractor proposals will be subject to TINA requirements, perform and document the required analyses, and prepare the required submissions to the Government. That’s a lot to get done in the short proposal preparation timeframe. Recent DCAA Guidance On June 30, 2009 the DCAA issued audit guidance entitled “Audit Guidance on Performing Audits of Subcontract Forward Pricing Proposals.” Much of the guidance focuses on how auditors might review subcontractor proposals before the prime contractor has completed its proposal efforts. This aspect of the guidance is relatively benign, unless one was to take issue with DCAA’s definition of a subcontractor. (DCAA uses the FAR Part 44 definition, which is expressly limited solely to activities covered by FAR Part 44 and thus does not apply to activities covered by FAR Part 15.) Other aspects of the audit guidance are more troublesome. The guidance instructs auditors to “(1) determine if the prime contractor completed the required cost or price analyses of its subcontractors and (2) review the adequacy of the prime contractor’s analyses. For those analyses that are not completed, determine the contractor’s completion schedule.” Importantly, the guidance directs auditors to question as being unsupported any proposed subcontractor costs for which the prime has not completed the required cost or price analysis. According to the audit guidance, “The contractor’s estimating system should have policies and procedures in place to conduct the required cost or price analyses and provide it to the Government negotiator prior to negotiation of the prime contract price. If, due to time or other constraints, the prime contractor cannot complete the required analyses prior to the submission of its prime contract proposal, the prime contractor should have policies and procedures in place to ensure a plan is implemented to complete the analyses prior to the prime contract negotiation. “ In addition to questioning proposed costs, the audit guidance directs that, for those contractors that continually fail to perform cost or price analysis, a “flash” audit report should be generated documenting the estimating system deficiency. For “major contractors,” this will lead to a “limited scope” audit to confirm the control failure. If confirmed, the DCAA auditor is to recommend that the contractor’s estimating system should be determined to be inadequate. Accordingly, contractors will need to focus on obtaining the necessary data from their proposed subcontractors and performing the required cost/price analyses, in order to avoid a significant amount of questioned costs and to maintain the adequacy of their estimating systems. Commentary on the DCAA Audit Guidance A couple of points on the DCAA audit guidance may help put it into perspective. First, when DCAA “questions” costs, it does not mean that the costs are unallowable or that the customer will not pay them. It does provide a strong position from which the customer can negotiate, and it means that negotiations will be harder than they otherwise would be. It’s not a position to aim for, and it will require hard work to overcome, but it is not fatal. Second, an inadequate estimating system is not the end of the world. Although a good Government contractor should have at least ten adequate control systems, estimating is not as important as, say, the accounting or billing systems are. That said, it will be difficult to be considered to be a “low risk” contractor—particularly when an ID/IQ contract will require multiple task order proposals—if the estimating system cannot be trusted. As with the questioned costs situation, it’s not a position to aim for, and it will require hard work to overcome, but it is not fatal. Finally, a word about TINA and the term “cost or pricing data”. The term “cost or pricing data” is defined at FAR 2.101. The DCAA audit guidance appears to conflate the terms “cost or price analysis” with “cost or pricing data” but they are not at all the same thing. TINA is a disclosure requirement. Contract actions subject to TINA (see FAR 15.403-4 and 15.403-5) need not be based on cost or pricing data; the cost or pricing data need merely to be disclosed in an organized fashion. Moreover, the proposal itself is not cost or pricing data. The prime’s cost or price analyses are performed on the proposal(s) submitted by the subcontractor(s), not necessarily on the subcontractors’ cost or pricing data. It is true, however, that where the prime is subject to TINA, its subcontractor cost or price analyses become part of its cost or pricing data to be disclosed to its customer. Lean Proposal Preparation Many prime contractors do not have time to solicit multiple subcontractor bids and evaluate them properly during the proposal preparation process. There is simply too much happening in to short of a timespan, and B&P budgets rarely permit the kind of robust staffing required to comply with the FAR requirements. Given the DCAA audit guidance and potential consequences associated with a continued failure to perform subcontractor cost or price analysis, it is more important than ever to establish a process where more can be accomplished in less time and for less money. The answer, as with most process improvement initiatives, lies with applying Lean principles to the proposal preparation process. Lean is about avoiding waste. Waste comes from many sources; commonly, waste in the administration process comes from the repetition of (1) prepare, (2) review, comment and return for rework, and (3) repair and resubmit. Any time this cycle can be broken will create process efficiencies. With respect to proposal preparation, it is important to work with subcontractors in the early stages of the proposal process to flesh out objectives, risks, and budgets. There is no time to return subcontractors’ proposals as being inadequate, or too expensive; the program team must operate as a single team by collaborating from day one in order to get it right the first time. Another area to address is to avoid treating the subcontract as if it was a transaction. If viewed as a transaction, then all the process steps need to be performed for each subcontract action or for each proposal. In contrast, treating the subcontract as part of an alliance or partnership creates opportunities to perform some process steps once and once only, and then leverage from those steps for future activity. For example, competing precision casting shops once and then awarding a long-term subcontract to the winner, for all precision casting activity over, say, a five-year period, avoids wasteful recompetition and permits the pricing to be evaluated once and then used again and again. Problem solved. There is much more to say about applying Lean principles to proposal preparation processes. The foregoing hopefully gives the reader a taste of what can be done with the right attitude and desire to streamline and improve. The recent DCAA audit guidance clearly spells out what will happen to those contractors who do not focus on this area.
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