Can ALICE Save the Day?
"I dare say you haven't had much practice. When I was your age, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast.” (Alice in Wonderland, Lewis Carroll) As this fragment of a technical paper presented at an August 2009 conference points out:”Currently, propellants used for Earth to orbit and orbit-to-orbit missions are expensive. Thus, there is quite a need for new-generation propellants which can be used in the booster stage as well as possess characteristics which make them storable in Low Earth Orbit (LEO).” Recent advances in nanoscale aluminum-water combustion have led to the first reported launch of a test rocket fueled by a combination of aluminum powder and water ice, or ALICE (ALuminum/ICE). If ALICE works out as advertised, we may be hearing more about this innovative propellant.  Scientists have studied aluminum-water combustion since the 1960s, since “the Al-H20 reaction liberates a large amount of energy … as well as green exhaust products,” according to the paper presented to the 45th Annual AIAA/ASME/SAE/ASEE Joint Propulsion Conference by a team of scientists from Pennsylvania State University and Purdue University (link above). More recently, studies have focused on aluminum combusting with frozen oxidizers, such as water ice.
 On August 25, 2009 news media carried stories reporting that a nine-foot long test rocket using the ALICE propellant “achieved a thrust of 650 pounds, accelerated to a speed of 205 MPH, and soared 1,300 feet into the sky” near Purdue University. A NASA scientist was quoted as saying that ALICE is “an environmentally-friendly propellant that can be used for flight on Earth and used in long distance space missions.” According to several reports, ALICE, when optimized, it could have a higher performance than conventional propellants. According to the U.S. Air Force Office of Scientific Research (AFOSR), “The propellant has a high burn rate and achieved a maximum thrust of 300 kg during the test.” One of the lead researchers, Dr. Steven Son, was quoted as saying, “The ALICE propellant can be improved with the addition of oxidizers and become a potential solid rocket propellant on Earth. Away from this planet, on the Moon or Mars, ALICE can be manufactured in those locations instead of being transported at a large cost."
So ALICE has promise. It may not need to be carried on deep space missions (since it can be manufactured from local materials found on the Moon or Mars, thus lowering the fuel weight and cost. It is environmentally friendly (unlike current solid rocket propellants). What’s not to like? ALICE seems to be a huge advance over current propellants. However, NASA has an unfortunate history of redirecting funds away from promising technologies in favor of large, congressionally supported programs. Let’s hope ALICE doesn’t get stood up by her patrons, and fulfills the promise of early tests. VIDEO OF ALICE LAB TEST:
The ALICE flight-vehicle accelerated to a speed of 205 mph and reached an altitude of nearly 1,300 feet. credit: Dr. Steven F. Son, Purdue University 
Proposed FAR Revision Hides Huge Impact Behind Innocuous Name
It's got a bland title, one that says "pay no attention to this technical change." But hidden inside is a huge problem for the majority of Government contractors.
On August 20, 2009 a proposed revision to the Federal Acquisition Regulation (FAR) was published with the innocuous title of "FAR Case 2008-020, Contract Closeout." Although some aspects of the proposed rule change did, in fact, address contract close-out activities, the majority of the language turned out to be a "wolf in sheep's clothing" that, if implemented as drafted, will significantly expand the powers of DCAA, and will force contractors to comply with arbitrary DCAA demands or risk monetary penalties.
The Good
Nearly five years ago (in 2005) the Federal government was concerned with the seeming inability of the contracting parties to close-out contracts after physical completion of the work. The administrative issues involved in the contract close-out process, including those related to finalization of indirect cost rates, seemed to defeat the best efforts of both contractor and Government employees. As a result, hundreds and even thousands of physically completed contracts were lingering on the Government's books like guests who wouldn't leave a party. Since the majority of those lingering contracts were "flexibly priced" types, that situation meant the Federal government didn't have a good handle on how much it might still owe its contractors--or whether those contractors owed it a refund based on their "final costs incurred." The financial situation was unclear and that prevented the agencies of the Executive Branch (DOD in particular) from generating accurate financial statements.
This was back in the day when the contracting parties still aimed for "partnering" with each other to overcome the mutual challenges of performing the contracted work. (In today's environment, such alignment is called an "independence violation" and "lack of oversight.") The Defense Acquisition Regulation (DAR) Council (aka DARC) asked contractors to meet with them and identify opportunities to better the contract close-out process so that more contracts could be closed-out faster. Input into that forum can be found here.
The DAR Council and others in the DOD mulled over the input for two years and, in 2007, came up with some recommendations to improve the process. In the words of the FAR Council, "The assessment resulted in recommendations for revisions to policy, guidance, and training related to contract closeout responsibilities in both the FAR and DFARS. The DARC opened DFARS Case 2007-D015 and recommended changes to the DFARS text and PGI documents." Government rule-making being what it is, it took an additional two years to get to the point where, on August 20, 2009 a proposed rule was published for public comment.
The foregoing is the background to why the proposed rule has the title it does, and why it contains some language that will be helpful to contractors. Some of the helpful language includes:
Revises FAR Part 4 to require clearing of final patent reports within 60 days of receipt. If a required patent report is not received, permits the Contracting Officer to proceed with contract close-out actions "upon consultation with the agency legal counsel responsible for patent matters." - Revises FAR 42.708 (Quick-closeout Procedure) to increase the dollar value limit of "unsettled indirect and direct costs" that qualify a contract action for quick close-out, from $1 million to $4 million.
- Provides more detailed guidance to Contracting Officers regarding the "risk assessment" to be performed when evaluating whether to utilize quick close-out procedures.
The above revisions are helpful but, in a seeming , quid pro quo, the FAR Council asks contractors to accept extremely unhelpful regulatory changes along with the helpful one.
The Bad
Currently, the FAR permits Contracting Officers to withhold some portion of the fixed fee owed a contractor, "in an amount necessary to protect the Government's interest [but the amount] shall not exceed 15 percent of the total fixed fee or $100,000, whichever is less." (See the clauses 52.216-8, 51.216-9, and 52.216-10.) Importantly the clauses directs the Contracting Officer to release "75 percent of all fee withholds under this contract after receipt of the certified final indirect cost rate proposal covering the year of physical completion of this contract."
This new rule proposes to revise those three contract clauses so as to "encourage the timely submission of an adequate indirect cost rate proposal." The revised language does that, and more.
For example, the revised clause language at 52.216-8 (Fixed Fee) now reads (in part):
"The Contracting Officer shall release 75 percent of all fee withholds under this contract after receipt of an adequate certified final indirect cost rate proposal covering the year of physical completion of this contract, provided the Contractor has satisfied all other contract terms and conditions, including the submission of the final patent and royalty reports, and is not delinquent in submitting final vouchers on prior years’ settlements. The Contracting Officer may release up to 90 percent of the fee withholds under this contract based on the Contractor’s past performance related to the submission and settlement of final indirect cost rate proposals."
Accordingly, if the proposed rule is finalized as drafted, contractors, fees will become hostage to the DCAA's determination that their final indirect cost proposals are, in the subjective judgment of the auditor, "adequate" for audit. What constitutes an "adequate" submission, one might wonder?
The Ugly
What constitutes an "adequate" final indirect cost proposal is discussed at FAR 42.705-1.
The FAR says "The required content of the proposal and supporting data will vary depending on such factors as business type, size, and accounting system capabilities. The contractor, contracting officer, and auditor must work together to make the proposal, audit, and negotiation process as efficient as possible. ... A contractor shall support its proposal with adequate supporting data. For guidance on what generally constitutes an adequate final indirect cost rate proposal and supporting data, contractors should refer to the Model Incurred Cost Proposal in Chapter 6 of the Defense Contract Audit Agency Pamphlet No. 7641.90, Information for Contractors, available via the Internet at DCAA. It is clear in the current FAR language that the DCAA "model incurred cost proposal" is "guidance" and absolute conformity is not mandatory for a determination of "adequacy." Indeed, the FAR acknowledges that "the required content ... will vary" by contractor.
The proposed rule will change all that, if finalized as drafted. The proposed rule defines an "adequate" proposal is great detail and, not coincidentally, the definition of adequacy is taken, word for word, directly from the DCAA's model incurred cost proposal. No more will contractors be able to adjust their proposals to match their business systems and cost accounting practices; they will be forced to comply in all respects with the DCAA's idea of an "adequate" submission, without regard to what makes sense for the contractor given its business type, size, and accounting system capabilities. This will undoubtedly impact many contractors and will disrupt their operations. To the extent that they will need to revise business systems and processes, or add resources, to meet these new requirements, it will increase the costs of doing business with the Federal government.
Although the Federal Register notice claims this proposed rule revision is "not a significant regulatory action," nothing could be further from the truth.
The other problem with this rule making effort is that it continues the recent trend of DCAA inserting itself into the procurement process, establishing a situation where DCAA's decisions affect the ability of the contracting parties to comply with contract terms. Whereas a decision by the Contracting Officer is subject to appeal under the Contract Disputes Act, there is no such appeal from a DCAA auditor's decision. Regardless of how arbitrary or capricious the DCAA decision regarding "adequacy" may be, it cannot be reviewed by any judicial entity -- which upsets the careful system of checks and balances established by the three branches of Federal government through the Contract Disputes Act and similar statutes.
Find the proposed rule here. Comment on the proposed rule at regulations.gov. or via mail following the detailed instructions in the proposed rule.
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DOD to Contractors in the Battlefield: You'll Be Paid When We Get Around to It
The Federal Acquisition Regulation (FAR), at Part 32.9, implements the Prompt Payment Act of 1982 ( Public Law 97-177), which was enacted to "require Federal agencies to pay their bills on a timely basis, to pay interest penalties when payments are made late, and to take discounts only when payments are made by the discount date." The purpose of the Act, and its implementing regulations in the FAR, was to protect contractors from a government bureaucracy that was notoriously slow to pay, and from the cash flow hardships caused by such slow payments. These contractors, who generally must follow all direction given to them by authorized government representatives, and who generally must continue to perform their government contracts regardless of any losses they may be incurring, had little if any recourse available to them for such contract breaches, short of litigation. But under the Prompt Payment Act, contractors could typically expect to receive payment for properly prepared invoices within 30 days (often sooner), or else receive an additional interest payment automatically--i.e., without making another request. Such robust protection is one reason that interest on financing, as well as bad debt expense, are considered "unallowable costs" under government regulations. Contractors shouldn't need to incur such expenses because the Federal government is such a good customer with respect to making on-time payments, so they can't claim the costs on proposals, invoices, or claims.
But no longer. On August 19, 2009 the Director of Defense Procurement and Acquisition Policy (Mr. Shay Assad) promulgated a memorandum to all military services that implemented a "class deviation" from the requirements of FAR Part 32.9 with respect to contractors involved in "emergencies ... military contingency operations ... and the release or threatened release of hazardous substances. ..." In that memo, which can be found here, Mr. Assad stated that the Department of Defense would no longer be bound by the promise to pay a contractor within 30 days of receipt of a proper invoice, or to automatically add an interest payment when due dates were inadvertently missed, for any payment that is "either certified for payment in an operational area, or ... contingent upon receipt of necessary supporting documentation (i.e., contract, invoice, receiving report) emanating from an operational area." His rationale for exempting these actions from the requirements of the Prompt Payment Act is that "It is clear that ... the operational area can be so fluid and dynamic that carrying out normal business practices can be extremely challenging [and] this deviation will provide the [Defense] Department with needed flexibility in limited circumstances." What a shame. Mr. Assad is discussing the very contractors deployed on the battlefields of Southwest Asia and elsewhere, the contractors supporting recovery operations in New Orleans and elsewhere, and the contractors who respond to terrorist attacks and accidental spills of hazardous substances. He is saying that the companies of these brave and dedicated individuals, who often risk their lives along with the military servicemen and women they support, cannot be assured of timely payment from the U.S. Government. Although those companies still need to make their payroll each pay period, and fly personnel to and from operations, and purchase supplies and equipment (and pay their suppliers on time), they should not expect timely payment from their Government customers. The Commission on Wartime Contracting has blasted LOGCAP IV contractors and their business systems. It seems patently unfair for the DOD to forgive itself its inadequate business systems while pointing the finger at the contractors' business systems. Moreover, if you wanted to disincentivize contractors from supporting contingency and emergency operations, if you wanted to severely limit competition to the few biggest companies who might have the resources to take this cash flow hit, while keeping smaller (more agile and potentially more responsive) companies out of the bid process ... well, this would seem to be an outstanding way of doing so.
Northrop Grumman to Sell TASC Consulting Business
On August 20, 2009 the Wall Street Journal reported that Northrop Grumman had announced it was seeking a buyer for its TASC consulting business. TASC is based in Herndon, Virginia, and employs roughly 5,000 people. Insiders say Northrop Grumman is hoping to sell the unit for $1 billion, and has retained Goldman Sachs and Credit Suisse Group AG as advisers. The Wall Street Journal article says that a deal for TASC could emerge by the end of September, and "private-equity firms are among the interested parties." Why sell now? There are clearly several meta-trends that could impact TASC's business model. 1. Conflict of interest rules. In May, Congress moved to close conflict-of-interest (COI) loopholes by tightening the standards to be applied to contractor employee who act as augmented staff to the Federal workforce. Cutbacks in Federal acquisition and program management staff over the past 15 years have resulted in a need to hire contractors to do what had formerly been "inherently governmental" functions such as designing specifications, determining technical needs, and developing solicitations. Clearly, companies (such as Northrop Grumman) that both supplied staff and submitted bids faced potential COI issues (which can be mitigated); but the tougher rules would tend to make it harder to keep from straying over the line. Significantly, TASC's competition includes Booz-Allen Hamilton, who does not offer military hardware. TASC is in the unenviable position of being denied advisory opportunities in order to protect Northrop Grumman's competitive position, while simultaneously denying Northrop Grumman bid opportunities because of TASC's existing advisory role. Splitting the entities is in the best interest of both. 2. Insourcing. Recognizing that the Pentagon may have relied too much on contractors to fill its staffing shortages, SecDef Gates recently announced an intention to beef-up his acquisition corps, in order to return thousands of jobs back to the Federal government. Thus, the need for TASC's services might diminish in the future. 3. The Obama administration's budget balancing act is just getting started. Recent reports indicate that the Pentagon has to trim $60 billion, for starters. It is likely that future demand for TASC's services will flatten or decline in the near future. Given the foregoing, it is no surprise that Northrop Grumman wants to divest TASC. The question is, given the cloudy future facing defense companies, will NGC get the premium it is hoping for? When contemplating the acquisition of any business that sells goods and/or services to the Federal government, it is important to evaluate the probability of contingent liabilities, and factor them into the deal. Government contracts, by their very nature, have long tails. It can take literally years after completion of the work for "contract close-out" to take place. Even after contract close-out and receipt of final payment, contract clauses give the Government the right to assert claims for an additional three years. Thus, after an acquisition an allegation of wrongdoing can surface that relates to actions that took place literally years before. Records can be missing, personnel may have departed, but the acquiring company still has to deal with the issue(s). It is critical to structure the deal so as to protect the acquiring entity from such contingent liabilities. Typically this is done either through purchase price adjustment, establishment of an escrow fund, or both. During the due diligence phase of the acquisition, it is critical to evaluate existing internal and operational controls, administrative attention to detail, and to try to assess the probability that a contingent liability will surface after acquisition. Some areas to evaluate include: compliance with Truth-in-Negotiation Act (TINA), accuracy of timekeeping, accuracy of invoicing preparation, and integrity of the accounting system and related controls. Note that these areas have limited overlap with Sarbanes-Oxley Section 404 internal controls, and require some degree of expertise in order to properly evaluate. In addition to the foregoing, considerable thought must be given to the post-acquisition control environment--particularly even two Government contractors are merging. Many operational control systems (e.g., estimating, accounting, billing, EVMS) have existing system descriptions that will need to be revised and resubmitted to Government oversight officials. The post-acquisition entity will need to allocate indirect costs and to calculate indirect cost rates; the cost impact(s) of the new rates on existing contracts cannot be ignored. Moreover, should one or both of the entities be subject to Cost Accounting Standards (CAS), then any changes to cost accounting practice must be carefully coordinated with Government customers, and may require revision of CASB Disclosure Statements and calculation of contract cost impacts in accordance with complex and very detailed process rules. In sum, there is quite a bit to think about and the traditional business-to-business M&A due diligence does not really address the necessary issues. Northrop Grumman is putting its TASC unit up for sale. They want to receive top-dollar (reportedly, $1 billion) for the business. Interested suitors will need to carefully weigh a myriad of detailed issues, as well as the impact of several mega-trends, when creating an offer. It will be interesting to see whether a deal that satisfies--and protects--both parties will be struck.
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