Acquisition reform has been a hot topic almost since the founding of the republic some 240 years ago. It was an issue during World War I and it was an issue again during World War II, and has been an almost constant issue since 1960’s. Politicians campaign on the promise that they can balance the Federal budget through reductions in unspecified “fraud, waste, and abuse”—and study after study is funded in order to figure out where the acquisition system can be streamlined in order to achieve those promised savings.

It doesn’t work, though, does it?

The status remains quo, in terms of acquisition durations and cost growth and system failures. The early problems with the F/A-18 program are similar to the early problems of the F-35 program. The shipbuilding overruns of the 1980’s are similar to the shipbuilding overruns of the 2010’s. And let’s not even get started on satellite programs.

Even with the best intentions and the strongest backing, there’s not much new in acquisition reform. The most that can be said about current Administration efforts is that they are characterized by a return to previous theories, as we recently pointed out.

In its nine years of existence, this little blog has documented some of those acquisition system reform efforts. It has also documented recommendations for system reform that were not adopted, or fundamentally changed, or even sabotaged. The Palantir story has become the poster child for the notion that entrenched program offices fight innovation that will challenge the status quo, aided and abetted by the contractors who spent millions of dollars to win their contracts and who don’t want to see their ROI threatened by newcomers.

Right now the Section 809 Panel is discussing acquisition reform efforts. Its first report contained many recommendations for reform, most (if not all) of which we heartily endorsed. The second report will be coming soon. But so what? All recommendations need to go through a gauntlet of attacks from the bureaucracy, contractors (with lobbyists), and political give-and-take. The chance that any of the Section 809 Panel’s recommendations will be implemented is small; the probability that all of them will be implemented is effectively zero.

Similarly, there is another group tasked with studying how to reduce DFARS rules. Any reform recommendations will need to survive challenges from entrenched interests within DoD—including (for example) DCAA and DPAP.

And speaking of similar efforts, we already devoted an article to the Defense Innovation Board, an entity comprised of 15 innovators and academics, sponsored by the Secretary of Defense, intended to “enhance the department’s culture, organization, and processes.” In eighteen months of activity, the DIB made 12 official recommendations that generated zero action. Reports said that DoD officials were “reviewing” the recommendations. As the Board itself notes (on its website): “The DIB provides specific recommendations, but does not implement change itself. It can however help identify and work with ‘sponsors’ inside DoD to take action, creating a sustainable foundation on which to generate successful ideas in the long run.” Meanwhile, the DIB continues to meet; it’s most recent public meeting was held in January, 2018.

Over at WIFCON, senior folks are bandying about ideas for how to speed up FAR Part 15 source selections. You should note right away that this is a focused discussion, not a general “boil the ocean” discussion. FAR Part 15 source selection. It’s a known thing and, if it can be streamlined, everybody would win. There are some good ideas in that discussion thread, but it’s easy to have ideas; implementation is the hard thing.

The point is, lots of effort is being made without much of a result. Even the best recommendations have a tendency to get lost in the DoD bureaucracy.

Meanwhile, Frank Kendall is telling people the problem is not as urgent as “myths” make it out to be. Over at DefenseOne, there is an article under Mr. Kendall’s byline entitled “Five Myths About Pentagon Weapons Programs,” in which he schools “service secretaries” and the rest of us about “sorting fact from fiction” with respect to the defense acquisition environment.

Myth 1: The defense acquisition system is broken

Myth 2: Excessive bureaucracy is the core problem with defense acquisition

Myth 3: Innovation is stifled by the acquisition system

Myth 4: Stronger “punishments” for cost overruns and schedule slips will lead to better performance

Myth 5: There is some new form of undiscovered “acquisition magic” that will fundamentally improve results

Now, we agree with some of those observations. We agree that punishments for program failure won’t keep other programs from failing. We agree that there is no “acquisition magic” that will fix the broken system.

But we don’t agree with the notion that the system isn’t broken, or that it can’t be improved through targeted evaluation and action. The WIFCON discussion thread referenced above is a good example of targeted reform. It’s not “acquisition magic,” but it is an effort at incremental acquisition improvement. Continuous incremental improvement is the right way to go, as Toyota has shown the world.

Further, we don’t agree that innovation isn’t stifled and we think we’ve proved that assertion with reference to the Palantir story. In addition, while excessive bureaucracy may not be the “core problem” it is certainly one of the problems with the acquisition system. When that bureaucracy is coupled to excessive power within the acquisition system, problems result. (Google Darlene Druyun for a classic example of what happens when an acquisition bureaucrat gains too much power.)

Finally, we must note the irony of Frank Kendall talking down acquisition reform. For years, Mr. Kendall was the poster child for wasted acquisition reform efforts, from the foolish “S2T2” industrial base mapping plan to the required IR&D technical interchanges to creation of mythical “awards” for DoD’s best-performing contractors. And then there was the series of "Better Buying Power" memos, which was a whole lot of sound and fury without signifying much if any lost-lasting change to the acquisition system. In 2011, Mr. Kendall told the U.S. Senate Armed Services Committee, Subcommittee on Emerging Threats and Capabilities, “the Department will replace intuitive judgments about the impacts of changing domestic demand, globalization, commercial-military integration, emerging sources of innovation, and other issues with data-driven industrial base evaluations. By continuously assessing the industrial base on a sector-by-sector, tier-by-tier basis, the Department will develop a reservoir of critical and actionable information.” Seven years later, it's widely acknowledged that the U.S. is rapidly losing its technological edge to its adversaries. The erosion took place under Frank Kendall’s watch, despite his promises to the Senate to prevent it.

In the past seven years—as we’ve documented on this blog—the “partnership” between the Pentagon and its contractors has deteriorated. Mr. Kendall publicly stated in 2012 that DoD was not in partnership with industry and that became the policy of the Obama Administration. As a result of Mr. Kendall’s policy, negotiations that used to take days or weeks are now measured in months. The pipeline of new DoD suppliers has dwindled and established non-defense suppliers now treat the Pentagon as a pariah—because of barriers to entry and onerous contract terms, among other reasons. The Pentagon is a bad customer and many of its traits were created (or endorsed) by Frank Kendall.

Thus, it seems ironic that Mr. Kendall would school us all on acquisition reform myths. Throughout his Pentagon tenure, he was the proponent of many acquisition-related myths. Some of the problems acquisition reformers are trying to solve were created under his watch. As for the rest of the problems, they certainly pre-date his tenure; but his efforts to address them were (at best) ineffectual. Some of his actions were, in fact, counterproductive. He created an acquisition culture that was so widely reviled that Congress eliminated his position within the DoD bureaucracy.

In conclusion, he is just about the last person on the planet who should be talking about acquisition reform.

In late February, 2018, DCMA briefed industry on the status of contractor business systems, from the government’s point of view.

Here’s what our readers need to know:

There are 8,826 individual contractor business systems being tracked in the DCMA CBAR database. (The number is calculated by individual CAGE code, so to the extent contractors have multiple CAGE codes, they may be counted more than once). Of that total, 8,529 business systems are currently approved. Of that total, 73 business systems are currently disapproved. And 224 business systems are currently “not evaluated.”

Thus, less than one percent of contractor business systems are disapproved.

Contractors must really have focused on improving their business systems since June 10, 2009, when the Commission on Wartime Contracting in Iraq and Afghanistan told Congress and the public that “roughly 30 percent of contractor business systems audited by [DCAA] contained significant deficiencies. The same analysis reveals that contractor billing systems and estimating systems were deficient at even greater rates—50 and 42 percent, respectively.” (Source: Commission on Wartime Contracting in Iraq and Afghanistan Interim Report to Congress, Page 27.)

Things must have really improved in the past nine years, because having less than one percent disapproved business systems is a lot better than the horror story that DCAA was testifying to (under oath) and that the Commission on Wartime Contracting was stating in an official report to Congress, one funded by taxpayer money.

Regardless of the accuracy (or veracity) of testimony and reporting, the rules were revised in 2012, and now significant deficiencies in any of the six business systems lead to mandatory payment withholds for those lucky contractors whose DoD contracts contain the DFARS contract clause 252.242-7005 (“Contractor Business Systems”).

That same DCMA briefing stated that the 73 disapproved contractor business systems have generated $206 million in payment withholds. In fact, the eleven (11) disapproved contractor estimating systems have, all by themselves, generated $200 million in payment withholds – meaning that the other 62 disapproved business systems have generated about $6 million in payment withholds.

Let’s stop for a second to consider the situation. Eleven disapproved estimating systems have generated $200 million in cumulative payment withholds. Those systems must really be bad, right? They must generate such bad estimates that the Pentagon (and Fort Lee) feels it is fair and reasonable to hold back nearly a quarter billion dollars of contractor cash flow.

Moreover, the data indicates that 15 percent (11/73) of the business systems generated 97 percent (200/206) of the total payment withholds. Those disapproved estimating systems must be very important to the Department of Defense—otherwise, somebody might think the situation is inequitable. The word “punitive” might even be tossed into the conversation.

On the other hand, the DCMA briefing didn’t focus on contractor estimating systems. Instead, it focused on contractor purchasing systems and contractor property management systems. Consequently, we don’t have anything more to say about the single contractor business system that generates 97 percent of the payment withholds.

With respect to contractor purchasing systems – which have generated (cumulatively) $5.65 million in payment withholds (as of the date of the briefing) – we have lots of stuff to report. Although only 21 contractor purchasing systems are currently in a disapproved state, there are 129 individual deficiencies associated with those systems. According to DCMA, by far the most common deficiency associated with purchasing system disapproval is an inadequate purchasing system manual (91/129). Not the actual practices themselves; the policies and procedures that guide those practices. The next most common deficiency is a failure to properly perform (and document) the check of the debarred/suspended contractor list (EPLS). Other deficiencies included a lack of file documentation (57/129), inadequate cost/price analyses (59/129), and improper administration of DPAS (54/129). Finally, another common deficiency is a failure to implement internal reviews and self-audits (34/129). Everything might be humming along just fine, but if you’re not checking (and documenting those checks), then you’re going to have a system deficiency.

With respect to contractor property management and control systems – which have generated (cumulatively) a paltry $480,000 in payment withholds – the briefing stated that there were many deficiencies, ranging from deficient procedures (91/978) to a lack of self-assessments (56/978) to inadequate records (89/978).

When your company grows to the point where it is subject to full CAS coverage, you also get to be covered by the DFARS business systems clause (assuming you are a defense contractor). You will probably have had individual business systems clauses in your contracts before reaching that point in time, but you probably haven’t paid too much attention to system “adequacy” once you passed your initial DCAA accounting system adequacy reviews. Then you hit that point and suddenly you need to really focus on CAS and business system adequacy. It can be overwhelming, but the price you pay for failing to focus on those compliance issues can be measured (and is being measured) in the millions of dollars of lost cash flow.

It seems to us that what you want to do is to get a bit ahead of things. You want to start to think about CAS compliance and business system adequacy before you actually get penalized for not focusing on them. The word “proactive” comes to mind. You might consider assessing things now, especially if you see a milestone looming ahead. Look out about two or three years and start to get your house in order today. Invest a little bit today to avoid a large, time-crunched, investment in the future.

Otherwise, when you do hit that point in time, you are likely to join the “payment withhold club.” And while you will be welcomed into that club (because misery loves company), you would very much seem to be better off staying out of it.