Shay Assad Moves On
I’ve always been confused by Mr. Assad’s role(s) within the Department of Defense. At different points, he’s been a mediator (between DCAA and DCMA), a policy-maker, a builder of empires, and an industry antagonist. And those are just off the top of my head.
Let’s be clear here: I’ve never met Mr. Assad (unlike some of my industry peers) and I do not know him personally. What I know of the man, I know through public information: the ineligible healthcare dependent position, the CAS 412/413 position, the redefinition of “adequate price competition” decision, the Performance-Based Payments cash flow tool, various DFARS Class Deviations, and other similar issues that have come from his office over the past nine years. A keyword search identifies that we have written about Mr. Assad and his directives 49 times since 2010; this article marks the 50th instance. A quick scan of those articles reinforces our opinion. Based on the public information available to us: not a fan.
And now Mr. Assad is moving on.
We already knew that Mr. Assad was departing his role as Director, Defense Pricing and Contracting and we alluded to it in mid-December. We didn’t know where he was going or what he was going to be doing, but we knew he was moving on. Now comes word, via a report by Marcus Weisgerber at DefenseOne, that Mr. Assad is being reassigned to a DCMA office in Boston. His exact role is unclear, but it is being described as a lateral move. The exact report is as follows—“in the coming weeks, Assad will be moved from his position as director of defense pricing and contracting initiatives to a lateral position within the Defense Contract Management Agency in the Boston area. …” It’s tough to imagine what “lateral position” DCMA might offer him in terms of policy-making impact, but it’s likely that “lateral” refers to pay band and not roles and responsibilities.
An interesting aspect of Mr. Assad’s compensation was a negotiated agreement to permit him to maintain a primary residence in the Boston area while commuting to Washington, D.C., for his job at the Pentagon. Unlike almost every civilian and military employee of DoD, he was not required to relocate to accept a new position. Indeed, the taxpayers paid for his commuting expenses (though we suspect it was reported as taxable income to him). The DefenseOne article stated—
Assad had a special arrangement that allowed him to live in the Boston area and commute regularly to Washington, current and former defense officials said. Neither Ash Carter, then the Pentagon’s acquisition chief, nor his successor Frank Kendall objected to this arrangement, because they viewed Assad as unusually good at saving taxpayers’ money.
According to the article, taxpayers spent $503,000 on Assad’s travel during the past seven years. Is that a lot? Not really. But it is unusual, isn’t it?
Although the travel reimbursement may be an interesting aspect of Mr. Assad’s compensation, it is not why he is being reassigned, according to the report. Two other reasons were given: the first was the recent proposed rule on contract financing payments, about which we have written fairly extensively. (Note: not fans.) The second reason had to do with Mr. Assad’s character. Although he was seen as a shrewd and tough negotiator, “some current and former officials also describe him as a bully who needed to be monitored by his superiors out of fear he would overstep his authorities.”
When one combines the travel reimbursement with the political backlash from the contract financing rule, and then combines those with the perception that he was a maverick that needed watching, it seems that Mr. Assad’s liabilities outweighed his benefits, at least in the minds of his bosses.
Thus: Mr. Assad’s return to a permanent work location in the Boston area, one near his home and family, at what we assume to be a commensurate salary.
A soft landing indeed.
UPDATE: CO Dispositions of DCAA Proposal Findings
Recently we wrote about a DoD OIG report that criticized DCMA contracting officers for failing to properly document dispositions of DCAA audit findings related to allegedly noncompliant contractor cost proposals. To be clear, the DOD OIG audit report found that each of the contracting officers associated with the 23 files reviewed by the OIG auditors “took appropriate actions to address the proposal inadequacies identified by DCAA.” The problem was that nine of the 23 files didn’t contain adequate documentation of those actions.
If you follow the link in the first sentence you’ll see that we criticized the OIG auditors. We noted that the audit report curiously failed to include any discussion of DFARS 215.408(4) and the solicitation provision 252.215-7009, which provide a mandatory proposal adequacy checklist that contractors are supposed to submit along with their proposals. We also noted that the audit report curiously omitted any discussion of the actual DCAA audit findings, so it would be impossible for a third party to determine the materiality of the lack of file documentation. We further noted that, in our view, the audit report provided a misleading statement of the actual FAR requirement (found at 15.406-3(7)), which requires that a CO document dispositions of DCAA auditor recommendations, but which is silent regarding what a CO is to do if DCAA simply reports that a contractor proposal is inadequate and does not provide any recommendations. Perhaps the DCAA audit reports did provide recommendations to the COs; but we cannot tell because the OIG audit report didn’t discuss the DCAA audit findings at all.
Another curious aspect of the DoD OIG audit report was to be found in the responses. Management comments were included from many sources, including the U.S. Army Contracting Command, the Naval Air Systems Command, the Naval Sea Systems Command, the Space and Naval Warfare Command, and the Department of the Air Force (Office of the Assistant Secretary for Acquisition). There was even a response from the Principal Director, Defense Contracting and Pricing. All responses were thoughtful; there were some (minor) disagreements with the OIG’s recommendation to conduct refresher training. That said, the response from the Principal Director, Defense Contracting and Pricing, was interesting in that it was a full concurrence with the recommendation to issue better guidance to contracting officers—and it promised to issue that guidance within 60 days.
In all of the foregoing, where was the Director, DCMA? Nowhere, as we noted in our original blog post. You would think that before anybody issued guidance to DCMA contracting officers, that guidance would be coordinated with DCMA leadership, would you not? Yet, apparently, that was not the case in this instance.
Weird, right?
Anyway, the guidance from the office of Defense Contracting and Pricing was issued, as promised. It requires contracting officers “to document all DCAA identified inadequacies in the negotiation memorandum or another part of the contract file.” In addition, “contracting officers also must document why the actions take appropriately address the contractor price proposal inadequacies.” So there you have it.
One more item of interest: Appendix B of the audit report (“Other Items of Interest”) noted some concerns with the Contract Pricing Reference Guides. For those who don’t know, these are very important sources of information used to provide direction and guidance to DoD contracting officers in evaluating and negotiating contractor proposals. (They are also really useful reference sources for contractors as well!) The OIG audit report noted that the auditors “found instances where the Guides are outdated.” In addition, the auditors “noted that the guides are difficult to locate on the Acquisition Community Connection website. While the guides are referenced on the Defense Pricing and Contracting homepage, the user is required to navigate through at least five pages to access the Contract Pricing Reference Guides.”
What’s interesting is that the Directorate of Defense Contracting and Pricing maintains those Guides—or at least, it is supposed to do so. Curiously, although the Directorate was quick to concur with the audit report’s Recommendation related to contracting officer file documentation, it ignored entirely the issue of maintenance of the Contract Pricing Reference Guides. Perhaps it ignored the issue because a response was not required. Or perhaps it ignored the issue because addressing it would have taken resources from the Directorate; whereas adding to the file documentation burden of contracting officers cost it nothing except for the paper used to issue the guidance.
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UPDATE: Contract Financing and Performance Incentives
Hey! Remember that proposed DFARS rule on contract financing payments? You know, the one we wrote about here and then again right here? (Actually we wrote a quick update in between those other two articles, but let’s skip that one.) You know, the one that—according to watercooler gossip and rumor—cost a DoD Director a senior leadership position.
Yeah, that’s the one. Not a great rule and, if gossip and rumor is to be believed, not a great public relations result at the public meetings held to solicit “public input” on the proposed language. (Hey, that’s a lot of “public” used in a sentence to describe a rule that, based on language and discussion points, really didn’t benefit the public to any great extent.)
Anyway, it’s back.
What? No, really. It’s back. And we’ve all got to deal with it.
The Federal Register noticed a new series of three public meetings to be held “to obtain views of experts and interested parties in Government and the private sector regarding revising policies and procedures for contract financing, performance incentives, and associated regulations for DoD contracts.” Yeah, for real.
The public meetings will be held in the Mark Center Auditorium, 4800 Mark Center Drive, Alexandria, Virginia, on the dates of January 10, January 22, and February 19. Note that participants (or onlookers) must register ahead of time.
Hey, let’s all hope these new public meetings go better than the last couple on the same topic, right?
What might participants wish to discuss at said meetings?
Well, if you recall, the earlier (now defunct) proposed rule sought to link the value of contract financing payments to certain performance criteria, including:
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Conviction or civil judgment related to fraud
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Criminal offense in connection with obtaining, attempting to obtain, or performing a public (Federal, State, or local) contract or subcontract
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Violation of Federal or State antitrust statutes relating to the submission of offers
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Commission of embezzlement, theft, forgery, or bribery
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Falsification or destruction of records
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Making false statements
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Tax evasion or violations of Federal criminal tax laws
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Receiving stolen property
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Any open level III or level IV corrective action requests (CARs) related to contractor business systems
Were we to present to the members of the DAR Council, we would note that the performance criteria specified in the (now defunct) rule had very little to do with enhancing performance in the “five domains” identified by the rule—i.e., On Time or Accelerated Contract Deliveries, Contractor Quality, Contractor Business Systems, Increasing Contract Opportunities for Small Business and for the Blind and Severely Disabled, and Receipt of Timely Quality Proposals. Really, at best only one of the detailed contractor performance criteria had any relation to any of the five domains; the rest were completely unrelated.
Moreover, every single one of the detailed performance criteria already had both legal and administrative remedies available to the government. Or did somebody on the DAR Council think that all those laws such as the False Claims Act, the False Statements Act, or the Federal Bribery Statute (to name but a few) were just there for window-dressing? And did the DAR Council think that the suspension or debarment rules were for show? And what about the Mandatory Disclosure rule? And what about the Contractor Business System Administration rule? And what about … we could go on, but let’s not.
The point is, there was no point to the (now defunct) proposed rule. It was redundant at best and double jeopardy at worst. It appeared to set up one single bureaucrat as the sole arbiter of how much a contractor might receive in contracting financing payments (to include performance-based payments) and, while authoritarianism seems to be in vogue these days, there is no reason to encourage it, especially when it puts thousands of jobs on the line and might end up hurting the warfighter.
DoD needs to declare what it cares about. If what the Pentagon cares about is accelerated contract deliveries and contractor quality, then it needs to award incentive contracts where the incentive is tied to on-spec, on-time deliveries. It’s that simple. If the Pentagon cares about contract opportunities for small business and for the blind and severely disabled, then it needs to incentivize prime contractor awards to such entities—though it may have to pay for those entities to become approved subcontractors.
And contractor business systems? Yeah, well that’s working out, isn’t it? Neither DCMA nor DCAA are resourced to effectively administer the oversight regime envisioned by the DAR Council in 2011, and we’re all awaiting a forthcoming GAO report that may shed some light on what’s working and what’s not working there. Our position is that the DAR Council broke it, and we need some new folks to come and fix it. Until then, keep the DAR Council the hell away from the topic.
So that’s what we might tell the DAR Council, were we to present at one of the three upcoming public meetings. But as we are not going to be in attendance, this blog article will have to suffice as a public record of our sentiments.
Pricing Subcontract Changes (Part 2 of 2)
In the previous article (Part 1 of 2) we went into some detail regarding differences between commercial item contracts and non-commercial contracts, focusing on how a prime contractor would deal with subcontract changes. We asserted that, generally, subcontract changes for non-commercial subcontracts would be valued on the basis of any additional costs incurred (though of course a change might lead to reduced subcontractor costs). We further asserted that, generally, subcontract changes for commercial subcontracts would be (or could be) valued on the basis of prices rather than costs.
We asserted that when a prime contractor has awarded a commercial subcontract, and then seeks to enter into a supplementary agreement with the subcontractor to make a change to that subcontract, then the value of the associated equitable adjustment may be based on price, and the subcontractor’s costs in performing that changed work are irrelevant if that is the case.
In this article we want to discuss two ASBCA cases that hopefully support those assertions.
The first case is yet another ASBCA appeal of a contracting officer’s final determination regarding Kellogg Brown & Root’s (KBR) LOGCAP III contract. If you were ever looking for a contract that generated litigation, this would be it. One of the reasons for that, of course, is KBR was supporting U.S. combat operations in Southwest Asia. Regardless of the amount of planning done, combat is (shall we say?) messy and tends to disrupt the best of plans. As a Prussian wrote 150 years ago, “No battle plan survives contact with the enemy.” The same truism could be said of contracting. No combat support contract, no matter how well written, survives contact with the battlefield.
Anyway, in this appeal, KBR sought reimbursement for the costs of settling two requests for equitable adjustment (REAs) by a subcontractor that was providing accommodations to house military personnel at bases in Iraq, including Camp Anaconda. KBR issued an $81 million FFP subcontract to First Kuwaiti Co. of Kuwait (FKTC) to construct 2,252 prefab trailers and transport them to a staging area bordering Iraq, from where FKTC would then transport them to Camp Anaconda. When they got to the Camp, FKTC would unload them and set them up for troop housing. At least, that was the plan. But the plan didn’t survive for very long.
As Judge Melnick (for the Board) wrote—
Main Supply Route (MSR) Tampa was the critical road for transporting supplies into Iraq from Kuwait. … Because there was a war on, MSR Tampa was extremely dangerous. Insurgent attacks began in the spring of 2003 and people were shot and killed. Among those who frequently lost their lives were KBR affiliated personnel. Its vehicles were attacked at least as early as July 2003. KBR was aware of and concerned about convoy force protection prior to the issuance of TO 59. In June 2003, the military imposed movement restrictions, requiring military control and escorts into Iraq of all assets, including contractors. The military required the escorts to reduce disruptions that would otherwise arise from attacks upon unescorted elements.
(Internal citations omitted.)
Long story short, the trucks carrying the trailers backed up at the border. FKTC had to incur additional costs to store the trailers until they could be transported. In addition, the Camp wasn’t fully prepared to receive the trailers, and thus FKTC incurred additional costs during the unloading and preparation phases of its work. FKTC submitted a request for equitable adjustment (REA) to KBR for “double handling.” Judge Melnick didn’t think very much of the subcontractor REA, characterizing it as “cryptic,” and noting that FKTC never disclosed its additional costs to KBR—it provided “rates and prices,” but never costs. KBR added $23.831 million to FKTC’s FFP subcontract to cover the “double handling.” In addition, FKTC submitted a second REA for “delays” and “idle truck time” at the border. Again, FKTC did not base its proposed REA on additional actual costs; it proposed a flat rate of $500 per delay day. Again, KBR negotiated the rates without addressing actual costs incurred, and added an additional $24.923 million to the FFP subcontract to compensate KFTC for the delays.
DCAA disapproved the payments because they lacked cost data to support them. DCAA disapproved $51.27 million in subcontractor costs, indirect costs, and award fee. The ACO allowed $3.78 million but disallowed the remaining $47.49 million. KBR appealed.
Another long story short, Judge Melnick found that the REA costs paid by KBR were unreasonable, pursuant to the requirements of 31.201-3. Because they were unreasonable, they were not allowable. Among other failures noted by the Judge, he wrote extensively about KBR’s acceptance of KFTC’s rates and factors instead of actual costs incurred. He wrote “Thus, an equitable adjustment is not based upon market prices, but reasonable incurred costs. … An equitable adjustment's use of actual cost data ensures that it does not produce a windfall.” In addition, Judge Melnick wrote—
… FKTC was required by its subcontract with KBR to support equitable adjustments with detailed cost breakdowns in conformance with FAR Part 31 and the DoD FAR Supplement. It was also required to maintain books and records reflecting its subcontract performance and make them available to KBR for cost-reimbursement purposes. Indeed, FKTC knew its truck lease costs but declined to disclose them. FKTC also maintained records of when trucks carrying trailers crossed the border, and records of the number of trucks waiting at the border on specific dates. It simply strains credulity that it did not record how much it actually paid its drivers while they waited at the border or how long trucks actually waited, especially given that it would ultimately seek millions of dollars in additional compensation for these events. It is highly unlikely that a company could grow to the size and sophistication of FKTC without tracking its costs. Significantly, KBR has not contended that it asked for such records at the time the REAs were submitted, or knew that they did not exist. It was not reasonable for KBR to simply assume they did not exist. It was not reasonable for FKTC to consider their absence acceptable, especially in light of FKTC's record-keeping responsibilities contained in the subcontract.
(Internal citations omitted.)
KBR tried to argue that its subcontract with FKTC was a commercial subcontract. (See? We got to that point eventually.) KBR argued that, because the subcontract was for a commercial item, “it was legally barred from basing [the REA] upon actual costs." Judge Melnick was not persuaded.
He wrote that “KBR's subcontract with FKTC does not contain the FAR's commercial items changes clause. Its changes clause permits unilateral changes and requires REAs to be supported with costs conforming to FAR Part 31.” Because the FKTC subcontract lacked the appropriate changes clause language, KBR could not claim should be treated as a commercial subcontract.
The appeal(s) were denied. KBR is out $47.49 million, unless it is successful on appeal.
The second case we want to discuss went a different way. Indeed, KBR cited to that decision in its arguments. The second case is an appeal of United Launch Services. The appeal has a long pedigree, going back to a first summary judgment decision in 2013 (ASBCA No. 56850) and then another (much more relevant) decision in June, 2016, followed by a very recent notice of final settlement in the contractor’s favor.
Summarizing all that litigation history into a blog article is tricky, and we already wrote too much about KBR. What you need to know is that the USAF awarded Boeing a fixed-price commercial item contract for Integrated Launch Services (ILS). The fixed price was based on a certain number of launches of certain missions, with each mission having a certain payload weight. The payload weight determined the launch vehicle used by Boeing. Importantly, the contract contained a commercial changes clause and did not contain any of the other changes clauses we wrote about in Part 1.
You really ought to read the 2016 decision. The interplay between Boeing and the USAF is fascinating. During the interplay, ULA was formed and became a subcontractor to Boeing, pending contract novation. Long story short, Judge Wilson found for ULA, stating that the subcontract had been changed by the USAF and Boeing/ULA was entitled to be compensated for the change. Judge Wilson reached back to the 2013 decision to discuss how to quantify and support an REA in a commercial subcontract. He wrote—
Although the term ‘equitable adjustment’ has been considered a term of art, that conclusion arises from its use in non-commercial items contracts where the government has a right to direct a unilateral change. In that context, the term is generally limited to requiring those ‘corrective measures utilized to keep a contractor whole when the Government modifies a contract.’ However, this customary understanding of the term need not be followed in the event of a significant change in context. The Changes clause in this commercial items contract dictates that it can only be changed with the agreement of the parties. It requires the parties to negotiate an equitable adjustment in the event they agree upon a change causing an increase or decrease in contract costs, performance time, or that otherwise affects any other contract provision, but it does not define the limitations of the equitable adjustment. The government cites no authority defining the term in this context. Appellant has produced evidence that the parties negotiated equitable adjustments under this contract based upon changed market conditions, and not merely upon changed costs, showing the term was intended to permit such action.
(Internal citations omitted.)
Accordingly, Judge Wilson found that cost information was not relevant to valuing an REA for a change to a commercial subcontract, at least in this instance. The subcontract contained prices for certain launches, and the change could be quantified using contract pricing, without regard to costs incurred. More than two years later (November, 2018), a brief decision announced that the parties had agreed to award ULA $240 million for the changed launch requirements.
But that’s not quite the end of the story. Going back to Judge Melnick’s decision in KBR, footnote 7 discusses, and distinguishes the 2016 ULA decision. Judge Melnick wrote “Nothing in United Launch Services dictates that the equitable adjustment of an allegedly commercial subcontract must ignore costs and rely only upon a price analysis.” We agree that the ULA decision did not state that costs must be ignored when available; but in that particular case of REA valuation costs were ignored and the ASBCA accepted the methodology used. In any case, it is unclear whether the comment in a footnote is precedent-setting, or simply dicta. But what do we know? We’re not attorneys.
So that’s the story on pricing subcontract changes. It’s been a long road; we trust it was worth the trip.
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