We already wrote about the final DFARS rule that conditions the allowability of contractors’ Independent Research & Development (IR&D or IRAD) costs on having “informal technical exchanges” with unspecified DOD officials prior to incurring those costs. At the same time, a proposed DFARS rule change was issued that would also impact contractors’ IRAD projects. The proposed rule, if finalized as drafted, would dramatically affect how Source Selection Teams evaluate offerors’ prices during a competition.

The proposed rule is simple. But the impacts are not simple at all. The proposed rule states (in part)—

If the Offeror, in the performance of any contract resulting from this solicitation, intends to use IR&D to meet the contract requirements, the Offeror's proposal shall include documentation in its price proposal to support this proposed approach.

For evaluation purposes only, the Contracting Officer will adjust the Offeror's total evaluated cost or price to include the amount that such future IR&D investments reduce the price of the proposal.

We must (once again) tell you we saw this one coming long ago, and warned our readers about it. When the DAR Council issued its Advanced Noticed of Proposed Rule Making (ANPRM) we commented as follows—

… the value of any related future IR&D projects is an estimated value. It is subject to change based on the financial fortunes of the company and the whims of management. … If a contractor puts those notional values into its proposal, does that make those estimates certified cost or pricing data? If those notional values are certified cost or pricing data, then if the contractor spends less than ‘promised’—is that somehow defective pricing? (Well, no. Because cost or pricing data are facts, not estimates. But you wait and see how many auditors assert those notional IR&D project values are actually cost or pricing data. You heard it here first.)

Additionally, if this proposed methodology is implemented we’ll all have to deal with the fact that IRAD projects are allocated to final cost objectives using the same base as is used to allocate G&A expense. (It’s commonly held that IR&D and B&P costs are part of G&A. That’s not strictly true. But it’s close enough for government work.) Thus, the value of any IRAD projects, for price evaluation purposes, is not the value of the IRAD projects—the value for price evaluation purposes is in fact the value of the IRAD projects that ends up being allocated to the awarded contract after it is awarded.

To figure out the correct value of the IR&D projects, for price evaluation purposes, you will need to know not only the value of the related IR&D projects, but also the percentage of the G&A allocation base that the proposed contract will end up being, after award. That means not only knowing the contract value of the proposed contract, but also knowing the contract values of all the other contracts that will comprise the cost input base used for G&A expense allocation.

In the future. Perhaps years in the future. For the entire period of performance of the contract for which the contractor is submitting its proposal. …

This is a bad idea and you should tell the DoD that it’s a bad idea.

And you should tell the policy makers and rule-makers why it is a bad idea.

The proposed rule ignores much of the cost accounting challenges associated with implementing it. Essentially, it says “we don’t care what the impact to the estimated contract price will really be. Instead we’ll simply add the gross IRAD project expenditure amount to the submitted cost estimate.” Thus, the proposed approach inflates the true cost of the IRAD project expenditure amount with respect to the individual proposal being offered.

Interestingly, the ANPRM notified us of a public meeting to be held March 3, 2106, to accept public input. The proposed rulemaking notification acknowledges that the meeting was held. And yet there is nothing in the background section of the proposed rulemaking notification that discusses the input received. It is almost as if the DAR Council wants to ignore any input. Indeed, since the proposed rule is almost exactly what was described in the ANPRM, it seems fairly obvious that the DAR Council did ignore any negative comments received at the public meeting.

If that’s the way the DAR Council considers input, we have to ask why they bother to go to the time and expense of holding such meetings. Seems like a big waste of taxpayer dollars.

Readers will have another opportunity to be ignored by the DAR Council, because comments are being solicited as part of the rulemaking process. Feel free to submit your comments so that they can be ignored, as has been the case with similar IRAD initiatives.

Why has the DAR Council consistently ignored negative input on these topics?

Well, we’ve recently called out one reason: Better Buying Power 3.0. It calls for these IRAD initiatives. Therefore the DAR Council must implement them. As we recently wrote—

… because BBP 3.0 called for this, it must be correct and its benefits must outweigh the costs. Forget public input. Forget an objective analysis of initiative. Just do it, because it must be done. This kind of magical thinking is reminiscent of religious cults. Please pass the Kool-aid.

All snark aside, we have to realize that the DAR Council is made up of individuals. It might be fair to characterize those individuals as career bureaucrats; you don’t get to that level without dedicating your professional life to the goal. And those career bureaucrats report up a chain of command, and many of them report into OUSD (AT&L). In fact, the Chair of the DAR Council is the Deputy Director, Defense Procurement and Acquisition Policy (DPAP), which reports into OUSD (AT&L). So it should be obvious why an important OUSD (AT&L) initiative such as BBP is going to be rammed through the rulemaking process, regardless of any public input received.

It’s an inherent conflict of interest, and one that works to the disadvantage of most contractors. (Yes, we’re saying the system is rigged.)

In another sense, the way the DAR Council has treated public input on these topics is a symptom of a bigger problem, which is that DoD wants to take contractors’ intellectual property. We wrote about this conspiracy theory right here. We think that article established the ulterior motive for this seeming war on contractors’ IRAD spending. We wrote—

This is not about leveling the playing field by reducing ‘games’ that some contractors can play—tactics that are perfectly permissible under the Federal Circuit’s interpretation of CAS 402 and 420 in the ATK Thiokol decision. No. Instead, this is about obtaining contractors’ intellectual property rights via subterfuge, in the guise of adjusting price evaluations. It’s about taking away the ‘independent’ in IRAD and thereby weakening contractor protections of their IP rights. As we think we’ve shown, the Pentagon has a long history of trying to obtain those IP rights, and the latest DFARS ANPRM fits perfectly into those historical efforts.

If you were to go read that “conspiracy theory” article, you would see that we are not alone in asserting there’s something else going on here. We quote several other—perhaps more respected—sources that make essentially the same argument. Perhaps there might be something to it?

In any case, here we are. DoD is moving forward on its BBP 3.0 plans to better deal with contractors’ IRAD expenditures. You will have an opportunity to go on record with your concerns and objections. They will be ignored. Then, years from now, you can point out that you were right and they should have listened to you.

That’s what we will be doing.

It’s been a while since we weighed-in on the DoD’s “should-cost” initiative. Frankly, there hasn’t been much to write about recently. We expressed our early concerns but since then we’ve also experienced two “should-cost” reviews – and they turned-out much better than we thought they would. Much of our passion about why “should-cost” was a wrong approach kind of melted away. (It also helped that the DoD participants seemed to lose their early zeal for the initiative as well.)

Despite saying all that, of course we did keep our eyes on “should-cost” and other related DoD initiatives. For example, we published an article on GAO’s study giving the Better Buying Power initiative a failing grade. Better Buying Power, like “should-cost” is one of those OUSD (AT&L) initiatives that sound great in a PowerPoint briefing, but that don’t work out as well as predicted in the real world outside the Pentagon.

Our point being: these initiatives permit senior leaders to give great testimony before Congress, but we should all be rightly skeptical that they will really ever amount to much. Indeed, sometimes they fail completely.

This may be one of those times.

The Hartford Courant (link above) reported that Lockheed Martin and Pentagon negotiators failed to reach agreement on the price for the next batch of F-35 aircraft. Normally when parties to a contract fail to agree, that would constitute a dispute that would require resolution. Not in this case, though.

Instead, the Pentagon used a “rarely invoked” contract clause to unilaterally establish the contract price at its last offer to Lockheed Martin.

According to the newspaper story—

That deal represented a 3.7 percent price decrease from the last batch of F-35s the Pentagon purchased, and Air Force Lt. Gen. Christopher Bogdan, the program's executive officer, hailed it as ‘a fair and reasonable deal.’

We all know that, of course, the deal must be “fair and reasonable” because the contracting officer has an affirmative duty to determine that the price is fair and reasonable. In other words, it was fair and reasonable because the government determined it to be so.

On the other hand, we might reasonably wonder whether Lockheed Martin viewed the deal in similar terms.

Twelve minutes after the Air Force announcement, Lockheed Martin issued an announcement of its own. According to the Hartford Courant story—

[Lockheed said] the contract was not ‘mutually agreed upon,’ and that the company was ‘obligated’ to produce the aircraft under ‘previously agreed to items.’ It said that it was ‘disappointed’ in the government's action and that while it would ‘continue to execute’ on the program, it would also ‘evaluate our options and path forward.’

Meanwhile, back inside the Beltway, USD (AT&L) Frank Kendall has been under fire by Congressional lawmakers who want to eliminate his position. In response, he recently touted reductions in cost growth associated with major defense programs.

We are forced to wonder how much of the reductions in cost growth came from unilaterally established prices with which the contractor was in no position to disagree.

Regardless, Mr. Kendall says he should keep his job because of BBP and “should-cost” and other initiatives that have led to improvements in the cost of major weapon systems. Even if you think he might be a bit biased (because his job is on the line) you have to give the man props for his chutzpah.

In related news, the 2016 report entitled “Performance of the Defense Acquisition System” was published and Mr. Kendall is using that report as the basis for his personal initiative to keep his job. But that’s not what interests us.

The report also discusses progress made by DCAA.

DCAA is considered to be a part of the defense acquisition system. Perhaps that’s a counter-intuitive thing to say to most of us who deal with DCAA auditors on a routine basis, or to DCMA folks who have had to pick up work formerly performed by DCAA auditors in the past, but nonetheless it’s true.

So let’s see what the official assessment is of DCAA’s performance as part of the defense acquisition system.

With respect to pre-award surveys of contractor accounting systems, the report states that it now takes DCAA an average of 58 days to issue its reports, and that it finds contractors to have acceptable accounting systems 91% of the time. (See page 137.)

With respect to incurred cost audits, the report states that DCAA has significantly reduced its backlog to only 5,700 reports awaiting audit. (Interestingly the report perpetuates the fiction that DCAA is permitted to have two years’ worth of unaudited proposals—some 11,000—as “regular inventory” as if somehow that was okay.) The report states “As part of DCAA strategic initiatives and in support of BBP 2.0, substantial progress has been made since 2011 on reducing the backlog of these audits.”

Speaking of chutzpah, we admire the attempt to give BBP credit for the reduction in audit backlog at DCAA. Readers of this blog know the reality of how the backlog was reduced, and we all know it had exactly zero to do with BBP 1.0, 2.0, 2.1, or 3.0.

But we suppose a man fighting for his job will say just about anything in order to keep it. Who would blame such a man? Not us.