Acquisition Reform, Again
The Federal acquisition system and, in particular, the DOD acquisition system, is broken and nobody knows how to fix it.
Sure, we’ve had Better Buying Power in at least three different flavors—all woefully limited in results obtained. We’ve had should-cost teams and peer reviews and Review Boards and a new DOD Directorate of Pricing was created—and problems still persist. The system remains broken.
It’s not like we haven’t written about this topic before. We have. We certainly have. We’ve opined and asserted and ranted and pointed out that individuals from within the bureaucracy are probably the worst people to try to make radical changes to that bureaucracy. Of course, nobody in power did anything in response to our pontifications … because they’ve probably never heard of this boutique consultancy. We’ve been told by people who should know that those SES and Schedule C leaders are doing the best they can. We’ve been told that it’s an almost impossible task and nobody is setting out to waste taxpayer money with doomed-to-fail reform efforts.
Yeah. But still …
Congress thinks it’s time for some radical changes to the bureaucracy, at least as expressed in this year’s not-yet-final National Defense Authorization Act (NDAA). If enacted as drafted, the NDAA will drive an “avalanche of acquisition reforms,” according to Sandra Irwin, writing for the National Defense Industrial Association. She lists some of the proposed reforms—but notes that not every proposal is expected to survive to the final bill that gets sent to President Obama. The list of proposed reforms includes—
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Roll-back military benefits
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Disband the office of the Under Secretary for Acquisition, Technology, and Logistics
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Redefine the role of the Chairman of the Joint Chiefs of Staff
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Penalize the Pentagon for issuing cost-type contracts (Irwin writes that the penalty would equal 2 percent of the funds obligated for procurement contracts or 1 percent of funds provided for research, development, testing and engineering contracts.)
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Reduce the number of general and flag officers by 25 percent and reduce the number of four-star officers to 27 from 41
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Require a DOD review of whether to allow small-business contractors to remain temporarily eligible for small-business set-aside contracts even if they outgrow size limits because of growing commercial sales
And that’s not all. Reportedly, Title VIII of the bill goes from Section 801 to Section 899, indicating there are at least 99 statutory reforms included.
In addition to the list above, Paul Pompeo wrote that the NDAA proposes “establishment of a new Cost Accounting Standards (CAS) Board to be housed within the Department of Defense (DoD).” According to Mr. Pompeo (a Government Contracts attorney at the firm of Arnold & Porter)—
The Committee had no kind words for the existing CAS Board. The Committee noted that the CAS Board has not met in more than three years, does not have a quorum, and that ‘it is doubtful that any credible reform will emanate out of [the CAS] Board in the future ...’ The Committee also asserted a need for a DoD-based CAS Board to meet national security needs better.
On that point, we have ourselves railed at the inactive CAS Board. For example, in this article we wrote—
The CAS Board needs to be active. The CAS Board needs to be soliciting input. There are real challenges that need to be addressed. For instance, we need a definition of ‘increased costs in the aggregate’ and we need to know whether the CAS Board accepts that the FAR Council took on the role of defining CAS rules, regulations and terms with respect to the 2005 revisions to FAR Part 30.6 and related CAS clauses. Does the CAS Board agree that concurrent changes in cost accounting practice must be calculated independently, without any offsets?
We need a workable approach to determining the value of an ID/IQ-type contract for CAS purposes. We need to take a look at the $700,000 floor for CAS coverage to see whether imposing the CAS requirements on such tiny contracts is in the best interests of the taxpayers.
There are a lot of things the CAS Board could be doing, but we’re not hearing about any of it, nor does the CAS site indicate that anything is happening. And that’s a real problem, in our view.
The lack of activity by the CAS Board has come to the attention of the Senate and they are proposing a significant reform in order to fix the perceived problem. In his article, Mr. Pompeo discusses why the fix might be worse than the problem. In our view, Ms. Rung (the CAS Board Chair) needs to attend to her duties and get the CAS train moving again.
So that’s the thing with respect to these upcoming acquisition reforms, isn’t it? Will the proposed fixes—and there are many of them—actually solve any problems, or will they make the problems worse. If recent history is any guide, it will be the latter.
Big 4 Drama
So Bob Esernio passed away last week.
You may not have known Bob; or maybe you did. Bob was one of those guys at the periphery of the well-known “celebrity” government contracting experts. To my knowledge he never authored an article for publication or wrote a book. He rarely (if ever) taught seminars or classes. Bob only had one connection on his LinkedIn profile. Chances are, you would have known Bob only if you were one of his clients or one of his Ernst & Young colleagues.
And that was Bob, basically. A head-down, get-r-done kind of guy: focused on meeting his commitments as an EY Partner. Which is not to say that his career was without drama. He had that in spades.
I first met Bob when I was trying to exit Andersen. Andersen was what they called it then, having recently changed the name from Arthur Andersen and having recently changed the Andersen logo from open doors to a bright orange ball. Was there a correlation between the firm’s branding change and its collapse? I’ll leave that to you to decide. The point here is that Andersen was shutting-down and I was one of about 26,000 people suddenly out of work.
I looked for a new job and EY was on my shortlist. I knew their Government Contracting Services (GCS) Partners—at least by reputation. Lou Rosen was the Head Honcho and I knew him from first-hand experience (as a Fed Pubs instructor) and by reputation (from his service on the CAS Board back when the CAS Board was a force to be reckoned with). I reached out and submitted a resume and—much to my surprise—I was contacted by Bob Esernio and his team. If memory serves I had a phone call or two before I realized that Bob didn’t work with Lou; it was an entirely separate team that was focused on government contractors. I didn’t know what was going on; but I knew that I wanted to work with Lou Rosen (because Lou, right?) and not this other guy I had never heard of. I called Deb Nixon and asked about this Esernio guy and I quickly got back on track. I guess it helped that Bob was interested in me; because I suspect that if Bob wanted me, then Lou’s team wanted me more—if only to upset Bob. And so I found myself working for Lou Rosen and his established GCS team, and my interaction with Bob from then on was minimal.
When I joined EY I learned that Bob and Lou had had a falling-out. The details were before my time, but I gathered that Bob had decided his career path was better served by starting his own, independent, practice. As he departed Lou’s team, he took some people with him. If you were there at the time, you had to choose between Bob and Lou, which I suspect would not have been an easy choice to make. Would you stay with the established team of SMEs, who were demanding and somewhat condescending and (quite honestly) more than a little arrogant in their SME-ness? Or would you take a chance on the Young Turk who could be charming and promised frequent team-building dinners at nice (and expensive!) restaurants? People made their choices and as those choices were made, friendships were strained and working relationships were broken.
Later on I made a similar choice, leaving EY in order to (re)start the West Coast Government Contracts practice at PwC. It was a gamble but I wanted to do things my way instead of how the EY Partners wanted to do them. I suppose Bob felt much the same way as he left to start his own practice. As it turns out I was good at many of the right things but not at the politics. It is more important to be good at the politics, as Bob knew. Bob was really very good at the politics and so it was no surprise that he made Partner while I never did.
Politics are important and people (like me) who focus on technical excellence get blind-sided by politics. If you have a choice in life, my advice is to be good at the politics and let the technical stuff take care of itself.
After I left EY (and after certain Partners retired) the two independent practices were force-fit back together and Bob served as the National Practice Director for several years. I suspect it was the fulfillment of his career aspirations. I don’t know whether or not he did well at the role, but I’m sure he tried very hard at it. Further, I don’t know whether there was drama in the merger but I suspect there was. At the very least, there would be suspicion that “Bob’s people” received favorable treatment as a reward for their loyalty to him back in the split. That said, one of "Lou's people" who worked for Bob at that time called him "mentor and friend" so maybe the drama was more in my imagination than anywhere else.
Partners retire at 60 but Bob retired at 55. I wasn’t around but I heard there was drama involved. That didn’t surprise me. There is usually drama and politics when you have a bunch of smart, ambitious people jockeying for power and money. And make no mistake: that is exactly what you have at a Big 4 professional services firm.
Those firms say that they are inclusive and focused on diversity, but the kind of diversity they welcome is not unlimited. If you are in a practice role (as opposed to a support role), it is highly likely that you are well-educated, smart, ambitious, and driven. We’re talking “Type A” personality all the way. Everybody is trying to impress and outdo everybody else. Late nights, weekends, extra tasks not only accepted but actually sought out. Learning the metrics that matter and excelling at those metrics. Learning the Partners that matter (which is just about all of them) and excelling at building relationships with them. Taking the required learning classes and making sure your accrued vacation balance is acceptably low while your utilization metrics are acceptably high. Doing whatever it takes because if you don’t there are many others who will! It’s a system intended to weed out people who don’t fit—those who don’t have the right “chemistry”—because every year another class of Associates joins the firm, and some of them may make Partner one day if you can’t (or won’t) do what it takes to make it. How can such an environment be short of drama? It can’t. Drama is everywhere.
People are different and they have different skills and different motivators. The Briggs Myers folks claim there are 16 different personality types. I don’t know about 16, but I know there is more than one type. But in the world of the Big 4, there really is only one type that succeeds—and that is the type that is driven to succeed.
A long time ago we published an article discussing the Netflix approach to HR management. It’s been called the single most innovative thing to ever come from Silicon Valley. You really ought to review it. Netflix tries to emulate a professional sports team: the company wants superstars at every position. My point is that each position requires a different skillset. It’s inherent in the approach. You think of a professional basketball team, you don’t think about five shooting guards. There are point guards and shooting guards and forwards and a center. Each position requires different skills.
Hopefully, when you staff a practice or create a project team, you get to spend some time thinking about the skills you will need and how you will source talent to find those required skills. But you should also be thinking about different personality types and who’s going to be a leader and who’s going to be a member of the supporting cast. If you have too many leaders, things can get confusing. Drama may ensue.
These thoughts, for better or worse, were inspired by Bob Esernio, who passed away at age 57.
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Huge Changes to SBA Rules
On May 31, 2016, the Small Business Administration published new rules that are sure to impact small businesses. The new rules are Final Rules—meaning the public comment period is over and now it is time to comply. They are effective on June 30, 2016.
But before we get into the meat of the new rules, let’s pause for a moment and note that FAR is not—nor has it ever been—the sole regulatory publication that provides requirements and guidance for small businesses. Too many people look at FAR Part 19 (“Small Business Programs”) and think that’s all there is. Nope.
Sure, FAR Part 19 contains important stuff, such as size standards and industry NAICS codes, small business set-asides, small business subcontracting plans, and important contract clauses (e.g., 52.219-14 “Limitations on Subcontracting). Those topics are important and they need to be read and understood. But they are not the be-all-and-end-all of the story. In addition to the FAR, people who are concerned with small business issues and compliance with SBA requirements need to also read and understand Title 13 of the Code of Federal Regulations—especially 13 CFR § 121, § 124, § 125, § 126, and § 127. That’s where the SBA Regulations are hidden. If you just read the FAR and skip the SBA Regulations, you are missing some really important stuff that impacts compliance.
The rule changes we are about to discuss impact the SBA Regulations in CFR Title 13. It will take time for the FAR Councils to adjust the FAR to match the new SBA rules—and so you need to focus on the SBA Regulations and (to a large extent) ignore FAR Part 19 for a while.
So what are these huge SBA rule changes?
Limitations on Subcontracting
The FAR contract clause 52.219-14 establishes a minimum amount of work that must be performed by the “prime” small business receiving a small business set-aside contract award. The requirement is intended to prevent a small business from being used as a “front” for a large business. Thus, the clause requires that at least 50 percent of the contract work must be performed by the “prime” small business that received the contract. How that 50 percent number is calculated depends on what is being acquired (services, supplies, or construction).
The new SBA rules clarify that the 50 percent value can include “similarly situated entity contractors.” The rule-makers stated—
Specifically, the NDAA [National Defense Authorization Act of 2013, a public law that required SBA to make these rule changes] deems work done by similarly situated entities not to be subcontracted work for purposes of complying with the limitations on subcontracting requirement. Thus, work done by a similarly situated entity is counted in determining whether the applicable limitation on subcontracting is met. When a contract is awarded pursuant to a small business set-aside or socioeconomic program set-aside or sole source authority, a similarly situated entity subcontractor is a small business concern subcontractor that is a participant of the same SBA program that qualified the prime contractor as an eligible offeror and awardee of the contract.
To implement the required changes, the SBA modified § 125.6 to explain “how to apply the limitations on subcontracting requirements to small business set-aside contracts. Instead of providing different methods of determining compliance based on the type of small business set-aside program at issue and the type of good or service sought.”
The new rules also specify how a Contracting Officer will determine which NAICS code applies to a procurement (and therefore which approach to the limitations on subcontracting calculation will be used. The appropriate NAICS code is based on the preponderance of what is being ordered, and the calculation applies only to that item. The rule-makers explained that—
The CO must first determine which category, services or supplies, has the greatest percentage of the contract value, and then assign the appropriate NAICS code. The corresponding limitations on subcontracting will apply to the contract, depending on whether the CO has selected a supply NAICS code or a services NAICS code. Thus, the statutory authority authorizes that the limitations on subcontracting apply only to that portion of the requirement identified as the primary purpose of the contract. … For a contract principally for services, but which also requires supplies, this means that the prime contractor or its similarly situated subcontractors cannot subcontract more than 50 percent of the services to other than small concerns. However, the prime contractor can subcontract all of the supply components to any size business.
Who is a Subcontractor?
Many small businesses use “1099 employees” (who are independent contractors) to support their contract performance requirements. There has long been controversy as to whether those independent contractors are subcontractors or subconsultants, or something else. (You really don’t want them to be employees unless you are making the proper payroll withholdings and making the proper payments to the IRS and other government agencies. For the record, we’ll note that the IRS says that if you control what the independent contractor does and how that person does it, then that person is in fact an employee.)
The new SBA rules clarify that “performance by an independent contractor is considered a subcontract.” The rule-makers attempt to put a positive spin on this clarification by noting that, if the independent contractor is a similarly situated entity, then the contractor’s efforts can be excluded from the limitations on subcontracting calculation. But we think the real story here is that if your independent contractors are not similarly situated entities (or cannot prove they are through the required certifications), then they will count as subcontracted dollars in the calculation. We strongly suspect that new approach is going to significantly impact many small business government contractors.
As a result of these rule changes, each small business that relies on 1099 independent contractors must reevaluate its approach. For some, it will mean converting individuals to employee status and making the required payroll-related payments (and perhaps extending other benefits). For others, it will require them to push their independent contractors to obtain the required certifications so as to prove that they are “similarly situated” as the small business prime contractor. In either case, a lot of work needs to be done—and done very soon. The rule-makers noted that large fines can be imposed for violations in this area.
Affiliation and Joint Ventures
Some changes were made to the affiliation rules, focusing on seemingly independent businesses owned by members of the same family. If that situation applies to you, we suggest you review the changes to the rules. In addition, the rules on joint ventures were changed “to broaden the exclusion from affiliation for small business size status to allow two or more small businesses to joint venture for any procurement without being affiliated with regard to the performance of that procurement requirement.” The final rules permits “a joint venture of two or more business concerns [to] submit an offer as a small business for a Federal procurement, subcontract or sale so long as each concern is small under the size standard corresponding to the NAICS code assigned to the contract.”
Other Items
The rules on calculating annual receipts (for purposes of calculating business size under a NAICS code) were clarified to include all income (except income items already listed as exclusions)—including passive income. This may impact some small businesses if they were mistakenly excluding passive income from their annual receipts calculations.
The new rules clarify when a business size recertification is required following a merge or acquisition of a small business. They now state that “if the merger or acquisition occurs after offer but prior to award, the offeror must recertify its size to the contracting officer prior to award.”
For those small businesses that participate (or that want to participate) in the Small Business Innovative Research (SBIR) or Small Business Technology Transfer (SBTT) programs, the rules clarified the size status of entities that are owned (or partially owned) by venture capital firms. The new rules state that—
… a single venture capital operating company (VCOC), hedge fund, or private equity firm may own more than 50% of an SBIR awardee if that single VCOC, hedge fund, or private equity firm qualifies as a small business concern which is more than 50% directly owned and controlled by individuals who are citizens or permanent resident aliens of the United States.
Conclusion
In summary, this is a significant rule-making effort with potential dramatic impacts to existing small businesses that are government contractors. We have only skimmed the surface in this article. If you want to learn more about this set of rule changes, we suggest you follow the link and read the (very long) Federal Register publication for yourself. Or, better yet, we suggest you contact an attorney with experience in this area and obtain advice on how best to comply. As we noted above, you don’t have much time and the potential downside of non-compliance could result in significant financial (and other) impacts to your business.
GSA Price Reductions Clause
Although sales to the Federal government via General Services Administration multiple-award, Federal supply, or government-wide Schedule are considerably less risky than other contract vehicles, they are not without their risks.
GSA Schedule sales are typically considered to be “commercial” sales, in that the companies providing the goods or services are considered to be commercial entities and the prices are negotiated based on a commercial sales history. But although the GSA Schedules website claims: “The Schedules program mirrors commercial buying practices, so customers can easily comply with federal procurement rules and regulations,” that is not entirely true. Compliance risks exist and many companies have run afoul of them. This website has several articles on settlements (very large dollar value settlements) entered into by companies that either failed to properly disclose their commercial pricing history prior to award, or failed to comply with the Trade Agreements Act (as the GSA interprets it).
Or failed to comply with the Price Reductions Clause.
See, the Price Reductions Clause is something that exists only in GSA Schedule-land. You don’t find it in contracts awarded under FAR Part 13, Part 14, or Part 15 procedures. You don’t find it in commercial sales practices. Thus, because of its existence, it gives lie to the GSA claims that its Schedules mirror commercial buying practices. It’s a big risky compliance area and many otherwise reputable companies have been tripped-up by its requirements.
Such as Deloitte Consulting, to name one recent victim of the Price Reductions Clause.
But before we get into that story, let’s make sure we all understand what the PRC requires of a GSA Schedule contractor. GSA Supplemental Acquisition Regulation contract clause 552.238-75 (“Price Reductions,” May 2004) states:
(a) Before award of a contract, the Contracting Officer and the Offeror will agree upon (1) the customer (or category of customers) which will be the basis of award, and (2) the Government’s price or discount relationship to the identified customer (or category of customers). This relationship shall be maintained throughout the contract period. Any change in the Contractor’s commercial pricing or discount arrangement applicable to the identified customer (or category of customers) which disturbs this relationship shall constitute a price reduction.
(b) During the contract period, the Contractor shall report to the Contracting Officer all price reductions to the customer (or category of customers) that was the basis of award. The Contractor’s report shall include an explanation of the conditions under which the reductions were made.
(c)
(1) A price reduction shall apply to purchases under this contract if, after the date negotiations conclude, the Contractor—
(i) Revises the commercial catalog, pricelist, schedule or other document upon which contract award was predicated to reduce prices;
(ii) Grants more favorable discounts or terms and conditions than those contained in the commercial catalog, pricelist, schedule or other documents upon which contract award was predicated; or
(iii) Grants special discounts to the customer (or category of customers) that formed the basis of award, and the change disturbs the price/discount relationship of the Government to the customer (or category of customers) that was the basis of award.
(2) The Contractor shall offer the price reduction to the Government with the same effective date, and for the same time period, as extended to the commercial customer (or category of customers).
(d) There shall be no price reduction for sales—
(1) To commercial customers under firm, fixed-price definite quantity contracts with specified delivery in excess of the maximum order threshold specified in this contract;
(2) To Federal agencies;
(3) Made to State and local government entities when the order is placed under this contract (and the State and local government entity is the agreed upon customer or category of customer that is the basis of award); or
(4) Caused by an error in quotation or billing, provided adequate documentation is furnished by the Contractor to the Contracting Officer.
(e) The Contractor may offer the Contracting Officer a voluntary Governmentwide price reduction at any time during the contract period.
(f) The Contractor shall notify the Contracting Officer of any price reduction subject to this clause as soon as possible, but not later than 15 calendar days after its effective date.
(g) The contract will be modified to reflect any price reduction which becomes applicable in accordance with this clause.
All those words above basically boil down to the GSA contractor identifying its Basis of Award customers, the prices (and other terms) paid by those BOA customers, and the relationship between those BOA prices and the GSA Schedule prices offered to the Federal government buyers. If the price paid by the BOA customers drops, there is supposed to be a corresponding drop in the GSA Schedule prices. The contractor has 15 days to notify the GSA of a required pricing change driven by the change in the BOA customer prices. If the contractor fails to notify GSA in accordance with the clause requirements, it has to refund any overpayments made by the Federal government (i.e., the difference between the price paid and the price that would have been paid had the contractor complied with the notification requirement).
But if the contractor knowingly reduced its BOA customer prices and knowingly withheld that information from the GSA, then it might be subject to allegations that it had submitted False Claims and then things can get really expensive.
See: Deloitte Consulting, LLP.
According to the DOJ announcement (link above the GSA clause)—
The Department of Justice announced today that Deloitte Consulting LLP (Deloitte) has agreed to pay $11.38 million to resolve allegations under the False Claims Act that it submitted false claims under a General Services Administration (GSA) contract. Deloitte is a nationwide consulting company headquartered in New York City. …
In 2000, GSA awarded Deloitte a contract for the provision of information technology services. The contract required Deloitte to reduce the prices it charged the government if it offered lower prices to specific commercial customers during the course of the contract. This settlement resolves allegations that between 2006 and 2012, Deloitte failed to comply with the price reductions clause in its contract, resulting in government customers paying more for Deloitte’s services than comparable commercial customers.
Deloitte Consulting paid more than $11 million to settle allegations that it had knowingly failed to comply with the GSA Price Reductions Clause. For those few who may not know, Deloitte is a very respected professional services firm—an affiliated entity of one of the “Big 4” accounting firms. The entity has access to whatever compliance expertise and resources it may need; and yet it failed to comply with the PRC in its GSA Schedules.
In fairness, Deloitte is a partnership and, if our experience with the Big 4 is anything to go on, project cost accounting and pricing is an extremely complicated exercise. It may have been difficult to monitor and report on BOA customer pricing. Indeed, it may have been nearly impossible to keep track of pricing offered to its BOA customers, given the number of projects, the number of partners, and the vagaries of the partnership’s accounting system.
And yet, that is what the firm signed up to when it entered into its GSA Schedules.
And that is what all GSA Schedule holders sign up to.
If you want a GSA Schedule, you must realize the compliance requirements that come with the deal, and be prepared to meet them. If you don’t exercise diligence, you too may find yourself the subject of a DOJ press release one day.
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From Australia comes a story (courtesy of The Telegraph) that PwC has “ditched” its “outdated” dress code for men and women. According to the story—
