Palantir Prospers Through Compromise
It’s been a long time since we wrote about Palantir, the company that (in our view) is the poster child for why the Department of Defense doesn’t get the innovation it says it wants. We first wrote about Palantir three years ago, in this article.
The article described a conflict between Palantir, a “commercial alternative” to the Distributed Common Ground System (DCGS), which reportedly suffered from poor performance in the field. DCGS, naturally, was fielded by traditional defense contractors, while Palantir was offered by Silicon Valley. We quoted one report that stated, “Palantir costs millions, compared to the billions the military has been pouring into DCGS.” At least one Congressman weighed into the fray, asking why “old tired (bureaucrats)” were “stopping the warfighter from getting what they know works.”
Indeed, why would you go with an expensive, poorly performing, solution when the warfighters were clamoring for an inexpensive, high-performing, solution? You wouldn’t in a rational environment. But as we all know, the defense acquisition environment is far from rational.
That first article concluded with a note that the Army continued to push the DCGS solution, by forming “teams of experts” to help with training personnel in the field, and by releasing an RFP for DCGS Increment 2. We noted that response was a “very traditional response by a very traditional defense program” – which is kind of the opposite of innovation, isn’t it?
Eighteen months later, we published a brief update note that Palantir had filed suit in the U.S. Court of Federal Claims, alleging that the Army’s DCGS strategy was “both illegal and irrational.” Importantly, Palantir alleged that the Army’s insistence on sticking with the problematic DCGS instead of adopting the better functioning Palantir solution had cost lives.
A few months later, we noted that Palantir had been successful in its bid protest suit. We quoted a report, saying the Judge was –
… ordering the Army ‘to go back and look seriously at whether there are in fact commercial products that can meet its needs either without modification or with some modification, but whether there are in fact commercial products, including from Palantir, that meet its needs,’ … The court upheld Palantir’s central legal argument that the Army violated a 1994 law -- the Federal Acquisition Streamlining Act -- by not conducting the market research needed to determine if commercially available items could meet its needs with or without modification. …
This was an important ruling, because it reaffirmed the official, statutory, preference for commercial items. The ruling also reaffirmed the need to conduct proper market research before concluding that there were no commercial alternatives available to meet the needs of the warfighter.
That last article was published at the end of 2016 and it’s been radio silence since then.
But now comes news that Palantir has succeeded, and the Army has awarded the company a $876 million contract to “replace the troubled Distributed Common Ground System.” That same report stated “In addition to the Army deal, Palantir has been making inroads elsewhere in the U.S. government. After the company made a similar legal challenge to the U.S. Navy, officials agreed to revamp its technology procurement process last year.”
In another article reporting the contract award, DefenseNews echoed our statement(s) about the situation, writing “DCGS-A is a poster child for how the Army has struggled to develop and field a highly technical capability while ignoring the pace of technological development outside of the defense world. It’s also an example where existing technology could have already provided a functional capability without further development.”
How did Palantir win its battle with entrenched Pentagon bureaucracy? It did so by forming an alliance with one of the traditional defense contractors that supplied DCGS. It partnered with Raytheon, effectively turning that major defense contractor from enemy into an ally. The DefenseNews article (authored by Jen Jensen, link above) reported—
While Palantir has not yet announced what it will be providing to the Army for testing, court documents from its lawsuit stated that its data-management product — Palantir Gotham Platform — does exactly what DCGS-A was trying to do and comes at a much lower cost.
Raytheon, which has been one of the many players in earlier versions of DCGS-A, will supply its FoXTEN open architecture software product, according to Todd Probert, company vice president for Mission Support and Modernization within Raytheon’s Intelligence, Information and Services business, in a statement provided to Defense News.
While we would like to hail this victory as a turning-point for defense acquisition, we suspect it’s not as significant as it might other wise be. Palantir’s co-founder, Peter Thiel, is a well-known Trump fundraiser and supporter who has significant influence in the White House. We’re cynically sure that influence made a difference in the Army’s willingness to contract with Palantir.
Regardless of the rationale for the acquisition sea-change, the fact is that Palantir will now have a chance to showcase its product. If that product performs well, we hope and trust Palantir will join the ranks of successful defense contractors.
More on Threshold Changes
Recently we had an opportunity to point out to readers that the 2018 NDAA had changed the TINA threshold, moving it from $750,000 to $2 million effective June 18, 2018. We also noted that the micro-purchase threshold and the simplified acquisition threshold were also changing. We discussed whether contractors should update their policies, procedures, and instructions to the new thresholds based on changes to statute, or if they should wait until the DAR Council implemented those statutory changes in the DFARS.
We concluded that contractors should lean forward. We opined that contractors should implement the new thresholds in advance of any official rule-making.
However, at a recent industry meeting, we got some pushback. Respected colleagues, frenemies, and competimates pointed out that solicitations issued by DoD components were going to use the “old” TINA threshold of $750,000 to decide when to request certified cost or pricing data. (FAR 15.403-4(a)(1) states “The threshold for obtaining certified cost or pricing data is $750,000.”) They asked if a contractor was supposed to push back and refuse to provide certified cost or pricing data based on the new threshold, and thus risk being found to be non-responsive to the solicitation requirements. When you put it like that, the answer is “no.” (Though we think it would make for a quick bid protest.) If the solicitation contains the 52.215-10 or the 52.215-11 or the 52.215-12 or the 52.215-13 clauses, because the contracting officer followed the regulatory guidance instead of the statute, then obviously the low-risk path is to provide the required certified cost or pricing data in the required format of FAR Table 15.2.
What we are advocating is a change to the contractor’s own policies, procedures, and instructions with respect to how it interacts with its subcontractors. We concluded that the contractor should adopt the statutory threshold changes in advance of any formal rule-making. In other words, the contractor should request certified cost or pricing data from its subcontractors only when necessary and when the value of the proposed subcontract is expected to exceed $2 million.
If a solicitation contains the “TINA clauses” (as listed above) then this may create a conflict. For example, the 52.215-12 provision states “ Before awarding any subcontract expected to exceed the threshold for submission of certified cost or pricing data at FAR 15.403-4 … the Contractor shall require the subcontractor to submit certified cost or pricing data (actually or by specific identification in writing), in accordance with FAR 15.408, Table 15-2 … unless an exception under FAR 15.403-1 applies.” In other words, the solicitation provision references the regulatory threshold and not the statutory threshold (even though FAR 15.403-4 clearly references the underlying statutes themselves). Thus, once again, the contractor may be found to be non-responsive if it uses the statutory threshold rather than the regulatory threshold when determining whether or not to obtain certified cost or pricing data from its subcontractors.
Obviously the more conservative and safer course of action is to wait for the FAR Councils to implement the statutory changes. However, if that’s your plan you may have a very long wait. At that same industry meeting, we heard that certain DoD interests do not like the new TINA threshold, and are planning to drag their feet with respect to regulatory implementation, while working hard to convince Congress to rescind the change. If you don’t implement the statutory change now, you may never implement it.
It’s your call.
We will point out one more thing: the CAS threshold is tied to the TINA threshold.
It’s hard to actually find the linkage, because when the CAS language was moved into 48 CFR Chapter 99, the government abandoned any pretense of maintenance. You can find the recent CAS Board preambles at FAR Chapter 99 on the acquisition.gov website (which is the official government website for acquisition regulations), but you can’t find the CAS program rules or the Standards themselves. Instead, you get a link to “the official codified Cost Accounting Standards” at a Government Printing Office website (gpoaccess.gov/cfr/index.html)—but that link is broken. If you do a search on “48 CFR Chapter 99” you get a hit with the correct GPO address, but that GPO address contains an outdated version of the CAS rules. It says that the 9903.201-1(b)(2) CAS exemption is “Negotiated contracts and subcontracts not in excess of $500,000”—which is woefully out of date. Other CAS exemption language is similarly out of date. And this is the official language. You have to go over to the unofficial Hill AFB website (farsite.hill.af.mil) to get the correct language.
The correct 9903.201-1(b)(2) CAS exemption reads: “Negotiated contracts and subcontracts not in excess of the Truth in Negotiations Act (TINA) threshold, as adjusted for inflation (41 U.S.C. 1908 and 41 U.S.C. 1502(b)(1)(B)).”
You can confirm this by checking the DCAA Contract Audit Manual, at 8-103.2 (“CAS Exemptions”) which provides that “negotiated contracts and subcontracts (including interdivisional work orders) less than the Truth in Negotiations Act (TINA) threshold” are exempt from CAS.
Note that the CAS exemption is tied directly to statute and not to regulation. Thus, regardless of what you do for certified cost or pricing data coverage, you must change your policies, procedures, and instructions with respect to CAS administration of subcontractors. Any subcontractor proposal valued at less than $2 million is exempt from CAS, effective 18 June 2018. If you try to impose CAS on such contract actions, say (for example) by including any CAS clause in the subcontract, then you risk being found to have committed a Public Law violation in your next CPSR.
By “slow-rolling” the implementation of the 2018 NDAA threshold changes into the acquisition regulations, the FAR Councils have created a problem for contractors. If the contractors wait for the regulatory implementation, then they must disconnect CAS coverage from TINA coverage. They will end up requesting certified cost or pricing data from subcontractors that are, by statute, exempt from CAS. This helps nobody and may well lead to increased procurement costs.
In our view, the only rational approach is to apply the statutory threshold changes now. The FAR Councils should immediately issue a Class Deviation to FAR 15.403-4(a)(1) to implement the new TINA threshold, even if formal rule-making takes a bit longer. If you are a contractor, you should discuss this quandary with your cognizant contracting officer and try to get some relief. It’s the smart thing to do.
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Not a Small Business: Expensive Mistake
We have noted several recent Department of Justice press releases about companies that have been found to have falsely certified that they met certain criteria and were thus eligible for award of certain contracts set aside for companies that met the criteria. Companies that claimed to be a small socioeconomically disadvantaged business, but were not. Companies that claimed to be a small woman-owned business, but were not. Companies that claimed to be a small, service disabled veteran owned business, but were not. Companies that claimed to be HUBZone small businesses, but were not. You get the idea.
If you are a small business, you probably know it. FAR Part 19 has lots to say about the subject, as does Chapter 13 of the Code of Federal Regulations. There are rules that address permissible size standards by NAICS code. The Small Business Administration has lots of information to help companies with the complexities of eligibility determination. (For example: here.) While the topic is deep and complex, and there are gray areas, the basics are readily determinable, such that you probably know whether or not your company qualifies.
When you qualify, you “self-certify”—that is, you execute a Representation or a Certification in Section K of your proposal. Those Reps and Certs are, of course, subject to the False Statements Act. If you falsely certify, that’s really not a good thing—as those Department of Justice press releases we noted above testify.
Of course, small businesses grow. As they grow, their compliance risks evolve. We’ve discussed that situation several times on this site, including this article. We wrote—
Many small business government contractors don’t evolve their infrastructure, their back offices, to keep pace with the compliance risks of their newer contract awards. They end up with a mismatch between the needs of their newer contract requirements and the capabilities of their administrative staff. That’s when consultants can add some value. But the real issue is not the knowledge or expertise of the team; the real issue is that the actual practices may need to change to match the compliance requirements of the newer contracts. The company may need to make fundamental changes to the way in which it does business.
Some small businesses get acquired. They get acquired by large businesses, or perhaps they get acquired by another small business. Either the small business becomes a large business or, perhaps, both buyer and target become large businesses by virtue of the acquisition. In either situation, the acquired company may no longer qualify for the socioeconomic niche it had relied on for contract awards. Those Section K Reps and Certs need to be reviewed before execution, lest somebody falsely certify to being something they are not.
In related news, the Department of Justice recently announced that it had reached a settlement with TrellisWare Technologies, Inc., a communications company located in San Diego, with regard to allegations under the False Claims Act that TrellisWare had falsely certified that it was eligible for Small Business Innovative Research (SBIR) program awards, when it fact the company did not qualify as being a small business. According to the DoJ press release, TrellisWare “is a majority-owned subsidiary of ViaSat, Inc., a global broadband services and technology company also headquartered in San Diego.” The press release explained—
Between 2008 and 2015, TrellisWare was awarded multiple SBIR contracts to provide the Navy, Army and Air Force with a variety of technology services and products involving communications and signal processing systems, including wireless networks used in military tactical environments. TrellisWare self-certified that it met the small business size requirements for eligibility to receive SBIR funding. But based on certain disclosures that TrellisWare later made about its ownership relationship with ViaSat, the government conducted an investigation into TrellisWare’s eligibility for SBIR awards. The government contends that TrellisWare was not eligible for SBIR awards because it was actually a majority-owned subsidiary of ViaSat at the time it was awarded and performed on SBIR contracts.
Apparently, the government asserted TrellisWare falsely certified that it qualified as a small business in order to receive SBIR contract awards, and that every single invoice the company had submitted under those SBIR contracts was an individual false claim. We’re confident that situation led to a very large quantum, and that TrellisWare/ViaSat was content to settle the allegations for $12.2 million.
Word to the wise: you need to review your Section K Reps and Certs from time to time, in order to make sure they are accurate. You probably want to restrict the authority of those who execute Reps and Certs on behalf of the company to those who can do so knowledgeably. You do not want to face a situation similar to the one faced by TrellisWare/ViaSat, where the government alleges you intentionally executed false Reps and Certs.
What Happened to Collaboration?
Recent news reports indicate that Lockheed Martin and its F-35 customer are having difficulty negotiating an acceptable price for the next tranche (Lot 11) of aircraft.
Again.
This seems to be a frequent issue, as we’ve noted before. For example, in this 2012 article, we quoted several high-ranking military commanders expressing concerns about the adversarial relationship between Lockheed Martin and its customer. (“Air Force Major General Christopher Bogdan, nominated to be the head of the F-35 Joint Strike Fighter Program Office, declared the relationship between his organization and Lockheed Martin … to be ‘the worst he has ever seen.’”) In this 2016 article, we discussed how, after the parties had failed to agree on a price, the government used a “rarely invoked” contract clause to unilaterally establish a price.
Now here we are in 2018 and negotiations are difficult, and the parties are making public comments in order to pressure the other side.
USNI News reported that—
Lockheed Martin submitted its Lot 11 proposal about a year and a half ago, but [Vice Admiral] Winter said the first offer from Lockheed Martin didn’t arrive at the Pentagon until more recently. Winter conceded he had hoped to have the deal finalized by the end of 2017. … ‘I will tell you I am not as satisfied with the collaboration and the cooperation by Lockheed Martin,’ Winter said. ’They could be much more cooperative and collaborative. We could seal this deal faster. We could. They choose not to, and that’s a negotiating tactic.’
‘The price is coming down but it’s not coming down fast enough,’ Winter said. ‘We don’t know to the level of granularity that I want to know, what it actually costs to produce this aircraft.’
Readers of this blog may find issues with Vice Admiral Winter’s quoted comments. For instance, the submission of the Lot 11 proposal was, in all likelihood, Lockheed Martin’s first offer. (Which is why a contractor that responds to an RFP is usually called an “offeror.”) In another for instance, let’s talk about cost “granularity.” The program WBS and OBS is a matter of EVMS adequacy, and Lockheed Martin (finally) received a determination that its EVMS was adequate years ago, after becoming a poster child for failed business systems. MIL-STD-881C is the governing document. As one EVMS consultancy states: “The summary WBS is developed by the procuring agency, approved by the Cost Analysis Improvement Group (CAIG), and normally provided to the contractor in a Request for Proposal. The contractor is expected, to expand the WBS down to a level where work will be authorized, planned and managed.” Thus, if the government customer wanted more granularity it could have easily specified the level it wanted.
But Lockheed Martin didn’t point to any of those issues in its public response. Instead, Lockheed Martin’s CFO asserted that Pentagon negotiators have become “less predictable” and are trying to reduce costs in areas that have previously been accepted. In this article, LockMart CFO Tanner was quoted as saying—
‘It’s not like negotiations were always easy, but I’ll say they were more predictable than they are today,’ Tanner said in an interview Monday. ‘There’s just more things that are being changed or things that you thought were sort of foundational elements of negotiation that maybe weren’t up for negotiation that now seem to be up for negotiation.’ For example, he said, the government now wants companies to eat various costs they once would have been reimbursed for. ‘Everyone should be interested in cost reduction, not simply not reimbursing elements of cost that you historically reimbursed,’ Tanner said. ‘That’s a strange way to get cost reduction and, I would argue, a very short-sighted, not helpful, not healthy for the industry and ultimately not healthy for the folks in the Pentagon buying under that strategy to use that approach.’
Further details regarding the costs that the Pentagon negotiators wanted Lockheed Martin to “eat” were not publicly released. But it really doesn’t matter much, does it? The point here is that this is a high-stakes game where the animosity between Pentagon and contractor is, once again, being played out in the public eye.
Shay Assad has been a consistent proponent of contractor price reductions through stronger negotiating tactics from the beginning. In 2011, we quoted: “Speaking at the Credit Suisse 2011 Aerospace & Defense Conference, Shay Assad said that the Pentagon is concerned with cost reduction, not margin reduction, and that he would be surprised if profitability went down even as spending is decreased.” In 2013 we wrote about Mr. Assad’s pet “should-cost” initiative—
Should-cost negotiations that do not result in significant price reductions (when compared to the contractor’s own estimate) seem to be seen as a failure by the government’s negotiators. In other words, the objective of ‘should cost’ does not seem to be to arrive as a ‘best guess’ or “most probable” estimated product cost; the objective appears to be to brow-beat the contractor into price concessions so that victory can be claimed in the fight against contractor profits.
In that same article, we discussed Frank Kendall’s Better Buying Power 2.1 comments about contractor profit, in which he stated—
Current profit levels in the aggregate are reasonable and sustainable, but they are not tied tightly enough to successful performance in meeting DoD goals. Traditionally, the Government’s objective position for contract profitability has been a function of perceived risk and the anticipated value to be achieved by successful contract performance. DoD profit policy and our acquisition strategies should provide effective incentives to industry to deliver cost-effective solutions in which realized profitability is aligned and consistent with contract outcomes.
So here we are in 2018, and Lockheed Martin, as the prime contractor for the largest single military weapon system program in the history of this country, is experiencing the fruits of those seeds planted long ago.
But it’s not just Lockheed Martin, of course. It’s many contractors in many diverse industries that support the Federal government. Many contractors are feeling the animosity from their government customers. The days where the official Pentagon policy of “partnering” with contractors—a policy that culminated in “alpha contracting” where the parties worked side by side in the same room to arrive at estimated costs—have long departed the scene. Its use seems to have peaked in the mid-2000’s, and not much can be found on the topic today.
If you are a government contractor entering into negotiations—particularly sole-source negotiations—you need to be prepared for a rough ride. The negotiators on the other side are trying to squeeze every nickel out of your price. And there is absolutely nothing wrong with that approach; that is their job. You need to be prepared for unpredictable and perhaps “unfair” negotiating tactics. You can best counter those tactics by strictly complying with the FAR requirements, and by bringing facts and figures to support your position.
Good luck.
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