TINA Sweeps Again and Again
Readers may recall that we did a couple of articles about TINA “sweeps” about a year ago. In the second article we discussed allegations that BAE Systems “defectively priced” a proposal to definitize a UCA and we used the allegations and the chronology of events (as established by the court’s findings) to look at TINA sweeps and when they should be performed.
(By the way, if you are getting confused by the acronyms we suggest you go read those two articles before continuing with this one.)
In that second article we opined that “it makes much more sense to perform sweeps just before the price agreement date. Do one complete sweep, identify any changed cost or pricing data, and disclose the changes as the final part of negotiations. Then execute the CCCPD right away. Risk is minimized and no further sweeps are necessary.” We still think that was good advice.
In related news, DoD issued a policy memo on June 5, 2018 entitled “Reducing Acquisition Lead Time by Eliminating Inefficiencies Associated with Cost or Pricing Data Submissions After Price Agreement (‘Sweep Data’).” Long story shortened, the memo discusses the curious phenomenon of a contractor submitting cost or pricing data after the date of price agreement as part of its efforts to ensure that the cost or pricing data to which it’s certifying is actually accurate, complete, and current. The problem is—as we noted in our articles—submitting cost or pricing data after the price agreement date does not mitigate the risk of defective pricing. Or at least, not by very much. Based on the memo's language, the Director of Defense Pricing/Defense Procurement and Acquisition Policy was really concerned about the issue of post-negotiation contractor sweeps; his concern was that those contractor sweeps can unduly delay the execution of the Certificate of Current Cost or Pricing Data and thus delay issuance of a contract.
Remember, as we told you, we’re measuring PALT now. And anything that increases PALT is a bad thing. The memo was issued to tell contractors to stop post-negotiation sweeps and get those CCCPDs executed ASAP.
In fact, the memo states that contractors that provide untimely submissions of sweep data may have estimating system deficiencies. Those can get expensive.
Further, the memo directs DoD contracting officers to request executed CCCPDs “no later than five business days after the date of price agreement.”
Note that DPAP issued a revision to that June 5th Class Deviation (dated June 7, 2018) that made some minor wording changes which did not affect the substance of the policy direction. Make sure you refer to the June 7th memo and not the June 5th memo when discussing how you are going to comply. Nitpickers abound.
What does this mean?
It means that you need to perform your sweeps as negotiations are happening, so that you can confidently execute the CCCPD and meet the five-day deadline. It's really that simple. You need to change whatever processes you need to change in order to make that happen, because if you don't meet the deadline you may find yourself with an estimating system deficiency--and perhaps an irritated contracting officer.
Over at WIFCON, the usual suspects have been debating this new policy guidance. Many folks don’t care much for it.
Many people do not agree with our position that post-award sweeps do not effectively militate the risk of defective pricing, which we maintain ends on the date of price agreement (or other effective date to which the parties may agree). Nonetheless, we continue to believe that if you want to address defective pricing risk, then you need to do the sweeps earlier. If you do the sweeps earlier, then you are going to be better prepared to meet the new five-day deadline.
There shouldn’t be anything extraordinarily controversial about that.
Editor's Note: This article has been edited to remove a quote from WIFCON at the individual's request.
Another DoDOIG SAR – Another DCAA Report Card
Every six months the Department of Defense Office of Inspector General (DoDOIG) issues another Semi-Annual Report (SAR) to Congress. The latest one was issued May 29, 2018. It covered the first half of GFY 2018—i.e., October 1, 2017 through March 30, 2018. As we do every six months, we looked at Appendices E and F to see how DCAA has been doing, in terms of productivity and quality. It’s a report card on the audit agency, if you will. For comparison purposes, the last time we reviewed DCAA’s report card was in December 2017—you can find that report card here.
How is DCAA doing?
We’re at the point where simply reporting on the number of DCAA audit reports issued is now a misleading metric. This is because 75 percent of all audit assignments were completed without issuing an audit report, according to the SAR. Thus, if we reported that DCAA issued a paltry 1,176 audit reports in the latest six month period, and then compared that number to the 1,243 reports it issued in the same period last year, or to the 1,480 reports it issued in the same period in 2016, or to the 2,267 reports it issued in the same period in 2014, or to the 14,760 reports it issued in the same period in 2007, you might be misled into thinking that auditor productivity continues to drop.
But that would be misleading, because we’re at the point were three-quarters of all audit assignments are completed without issuance of a report that could be subject to a GAGAS (or GAS) compliance review. So let’s not do that.
Instead, let’s look at total assignments completed. DCAA completed 4,727 assignments in the first six months of GFY 2018. In comparison, DCAA completed 4,634 assignments in the first six months of GFY 2017. That’s much better, isn’t it? That metric shows that auditor year-over-year productivity actually increased by two percent. Nice.
Let’s keep happy thoughts and not compare assignments completed to the first half of GFY 2010, when DCAA completed 8,293 audit assignments in the first six-month period. Because that might cool the warm feeling of accomplishment we just enjoyed. Let’s stop dwelling on ancient history and get back to the present.
Similarly, total dollars examined increased year-over-year by nearly 10 percent. That’s got to feel good, right? And questioned costs are up year-over-year as well, by nearly 18 percent. Even sustention rates are holding steady at just about 30%. Those are all good numbers and DCAA should be proud of them.
DCAA’s focus on completing 10100 “incurred cost” audits (by whatever means necessary, including closing them without actually auditing contractors’ claimed dollars) is paying off for the audit agency. We may all see a point where the ICS backlog is down to manageable levels.
It will be interesting to see what a “steady state” DCAA looks like, in a year or two. We expect that we will see increasing numbers of post-award “defective pricing” and CAS-related audits. We may even see the return of the post-award accounting system audit for major contractors, once the latest audit program is polished and released.
So—all in all, a decent report card. Sure, standards have fallen since the olden days, but haven’t they done so everywhere? Why should DCAA be exempt from the phenomenon? When you look at recent performance, the first half of GFY 2018 looks good. And that portends a solid future for the audit agency.
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DoD Implements New TINA Threshold—Again and Again
It’s not like we want to keep talking about this, honestly. We’ve written and published article after article, discussing the increase to the threshold at which obtaining certified cost or pricing data is required (and below which obtaining CCOPD is prohibited) that was written into public law in the 2018 National Defense Authorization Act (NDAA) and now must be implemented by those agencies subject to that law. Interestingly, it’s been the civilian agencies not subject to NDAA that have been the quickest to take advantage of the new TINA threshold; whereas the Department of Defense has chosen a slower and less obvious route.
For example, whereas the NDAA directed that the micropurchase threshold be increased to $10,000, the DoD has chosen to issue a Class Deviation that increases it only to $5,000 (in normal circumstances). Similarly, whereas the Department of Energy has issued a Class Deviation to increase the TINA threshold to $2 Million, the DoD has issued multiple Class Deviations (that supersede each other) in attempts to do the same thing.
For example – and as we told readers – DoD issued Class Deviation 2018-O0012 (April 13, 2008) to implement the NDAA threshold. All was well with respect to new contracts awarded after 1 July 2018, but nothing was said about existing contracts. The DOE Class Deviation addressed existing contracts, and invited contractors to request contract modifications to implement the new thresholds “without consideration.”
Perhaps it was only a timing issue. Perhaps DOE simply had more time to think about it than DoD did.
But then DoD issued Class Deviation 2018-O0015 (June 5, 2018) – which superseded 2018-O0012 – and rectified the oversight by providing additional clauses that can be used to modify an existing contract “without consideration” that would raise the TINA threshold with respect to subcontractor cost or pricing data. The Class Deviation stated—
In the case of a change or modification made to a prime contract that was entered into before July 1, 2018, the threshold for obtaining certified cost or pricing data remains $750,000, with the following exception. Upon the request of a contractor that was required to submit certified cost or pricing data in connection with a prime contract entered into before July 1, 2018, the contracting officer shall use the clauses provided in Attachment 1 of this deviation … to modify the contract to reflect a $2 million threshold for obtaining certified cost or pricing data for subcontracts entered into after July 1, 2018.
So while it took a couple of tries for the folks at DPAP to get it right, at the end of the day we should be happy that the Class Deviation(s) were issued and that contractors have a clear path forward to get their contracts modified to align TINA requirements with the public law.
If you can’t figure it out by this point, we suspect you’ll need to hire somebody to assist you. It will be an investment well worth making.
You’ve Been Acquired—Now What?
The exit strategy for many small businesses is to be acquired by a larger entity. The exit strategy for many businesses owned by private equity or venture capital is to be acquired by another (typically larger) entity. At bigger companies, sometimes two rivals merge (think Lockheed + Martin Marietta or Boeing + McDonnell Douglas).
It’s a big deal when two companies join together, and it’s an even bigger deal when two government contractors come together. The acquisition (or merger) day is the result of many months of detailed planning by cross-functional teams. The process involves reviews by many levels of management, and sometimes reviews by government entities are required. The number of moving pieces required to come together in order to execute a corporate acquisition is huge and it’s a big deal for everybody involved, whether target or buyer.
Yet, most acquisitions don’t achieve the promised results. One website asserts that “a KPMG study indicates that 83% of merger deals did not boost shareholder returns” but the so-called “link” to that KPMG study goes to a news site, not to KPMG, so we think the assertion needs better support. In our experience, most acquisitions don’t achieve the results promised when the deal was brought to management for review. We’re not saying it is 83% but it’s north of 50%--based solely on what we’ve experienced. Most acquisitions “fail” to deliver the promised ROI and some actually deliver negative ROI.
But we keep doing them, don’t we?
This article discusses some of what we’ve seen. This isn’t the first article on M&A activities: you can check out this one, if you’d like to. This article is going to be written from the viewpoint of the target company, the one being acquired. For the buyer, we don’t expect much is going to change; but for the target the future will be all about change and change management.
The first and most important question is how the acquired entity is going to be run. Will it be fully integrated into the ongoing structure and systems of the buyer, or will it be allowed to run as a “stand-alone” subsidiary? Until you’ve answered that question, you can’t move forward very much.
The first problem is that you probably answered the first question incorrectly.
No matter how you answered it, you probably got it wrong.
Because there is no such thing as a stand-alone operation—at least, not in our experience.
A pure stand-alone operation would not participate in any benefit plans. A pure stand-alone operation would not participate in any shared back-office services, such as payroll processing or accounts payable check-writing. A pure stand-alone operation would have its own policies and procedures, and its own legal staff, and its own HR staff. Accounting consolidation would consist of the target sending the buyer a file each month that contained the financial results, as recorded on the target’s books and records. It would be up to the buyer’s accounting department to map the file to its own books and records.
Could it all happen that way? Sure. But in our experience, never. We have never seen an acquisition or merger where the target didn’t merge—at least to some extent—with the buying entity. If nothing else, benefit plans were shared. But usually there is a lot more integration going on.
And that integration is the tricky part.
Somebody is looking at employee benefit plans, not only the medical coverage but also the retirement plans.
Somebody is looking at facility and individual security clearances.
For that matter, somebody is looking at facilities costs to see if consolidation is feasible.
Other people are looking at the indirect rate structure—at both the target and the buyer—trying to see if merging them makes sense.
Lots of other people are looking at the business systems—not just at the ERP system(s), but also at the six DFARS business systems—trying to see if merging them is more trouble than its worth.
And those activities are just the tip of the iceberg.
If you are being acquired, we recommend addressing the above issues (and all the myriad other issues) head-on, as early as possible. We recommend being forthcoming about such topics as—
Et cetera.
We think it’s important to approach the above subjects with the right attitude. We would recommend not being defensive and not being stuck on “this is the way we’ve always done it.” Be open to change. In fact, the buyer might implement important changes that benefit the target in ways that are not clear at the moment. Instead, approach the above subjects with a realistic “cost versus benefit” perspective. What are the risks? What will it cost to address them? What are the expected benefits? Develop an ROI for the changes, and use that ROI as a lever to pry people from their comfort zones.
Being acquired is a time of uncertainty. People are (naturally) worried about their jobs and how the buyer is going to create efficiencies. Embrace that feeling. Tackle it head-on. Develop cross-functional plans that achieve optimum outcomes for both buyer and target. If both sides don’t approach the acquisition from the perspective of achieving the optimum outcomes, then they are almost guaranteed to achieve sub-optimum outcomes.
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