Acquisition Reform Failure
History is the final judge of a President. History is the ultimate arbiter, the last word. History is the “decider” regarding exactly how a President will be remembered.
Ultimately the polls measuring public approval of the Chief Executive of the Executive Branch, taken during or immediately after his Presidency, mean little or nothing. As time passes, events are placed into context and secrets tend to reveal themselves, such that the final verdict about a President’s success or failure may come years or even decades after that President leaves office. According to Gallup, Harry Truman had an average public approval rating of 36.5% during his second term (coincidentally the same has George W. Bush’s second term average)—though at one point in 1952, Truman’s public approval rating was a dismal and embarrassing 22%. But Truman’s approval rose over time. As one summary puts it: “Truman's stature also rose in subsequent years because it became easier for both scholars and the public to discern and appreciate his significant contributions.” Similarly, it was not until 40 years after his resignation from office that Nixon’s true role in sabotaging the 1968 Vietnam War peace talks was confirmed. In addition to his many other “foibles,” Nixon’s actions delayed the war’s conclusion and some people have called those actions “treasonous.” Those voting for (or against) Nixon in 1968 or in 1972 didn’t know of those actions; it took a long time for them to be known and placed into context, and for the verdict of history to judge them accordingly.
Thus, it is unreasonable to expect that our current views of President Obama, whether positive or negative, will match the verdict of history. We simply do not know enough at this time to make an informed judgment.
That being said, we wonder if one day President Obama might be known for his inability to implement any meaningful acquisition reform of the Federal contracting environment.
It’s really hard to identify any significant acquisition reforms implemented by the Obama Administration—especially in contrast to the many significant and far-reaching reforms carried out during President Clinton’s two terms in office. We understand it’s fashionable today to call-out those Clinton-era reforms as being overly optimistic or naïve or even counter-productive, but at the time they had almost universal support. Indeed, in many ways they accomplished their stated objectives, which was to make the Federal bureaucracy work better and to reduce contractors’ costs by reducing the military-only requirements imposed on them. Regardless of your views of those reforms, whether positive or negative, it’s impossible to argue that they didn’t happen or that the current Administration’s do-next-to-nothing approach is actually a better strategy than Clinton’s let’s-try-this-out approach.
Indeed, the majority of the Obama-era reform efforts, to the extent they exist at all, seem to be driven by certain satrapies within the Department of Defense who are seeking to roll back the Clinton-era reforms. In other words, the primary efforts at acquisition reform seem to be to undo the reforms enacted twenty years ago.
Witness, for example, the nearly 180 degree turn away from the DoD’s prior enthusiastic acceptance of Performance-Based Payments (PBPs) as not only an innovative method of contract financing, but as actually the preferred method. In the mid-1990’s it was felt that traditional cost-based progress payments didn’t do much to foster actual progress; instead they basically seemed to reward contractors for spending taxpayer money. PBPs actually seemed to link payments to progress, and even though they required more up-front investment the notion was fairly well received. Indeed, one of the stated benefits of PBPs was that after the initial investment, there was essentially nothing to audit or administer—thus reducing “non-value-added” contract oversight such as DCAA audits of costs incurred under firm, fixed-price contracts. But today’s Pentagon policy-makers want to go back to traditional cost-based progress payments because … well, because that’s the way it’s always been done. (If there’s a better rationale, we haven’t seen it.) Today’s policy-makers prefer the traditional approach because it’s easier to audit and administer, even though it decouples payments from progress. Indeed, it is seen as a virtue that auditors have something to audit when cost-based progress payments are used.
Thus, we conclude that, instead of innovating and streamlining, the majority of current Pentagon reform initiatives seem to be focused on adding bureaucracy and on adding requirements that tend to increase contractors’ costs. For a discussion of the extraordinary efforts the current bureaucracy will take in order to justify the current status quo, please see our article criticizing the report issued by the Better Buying Power team, the culmination of five years’ of effort to identify opportunities for regulatory roll-backs. We went into painful detail on a specific opportunity in this article covering TINA compliance streamlining.
For yet another example of what we’re talking about, let’s discuss the recent debacle regarding acquisitions of commercial items. For background, read this article or perhaps also this one. We called DoD’s proposed reform of commercial item acquisitions a “misstep” and we think events have confirmed our assessment. After a barrage of public criticism, even the Under Secretary of Defense (AT&L) thought the rule needed to be rewritten so as to avoid a “narrow interpretation.”
Consequently, nobody should be overly surprised that the proposed rule was withdrawn in early December, 2015. As attorneys from Covington & Burlington opined—
Last week, the Department of Defense (“DoD”) quietly withdrew its ill-received proposed rule on the evaluation of price reasonableness in commercial items acquisitions.Issued on August 3, 2015, the Proposed Rule purported to provide guidance for evaluating the reasonableness of prices using data other than certified cost or pricing data. As we previously reported, it fell short of this goal and, instead, increased confusion in the determination of price reasonableness for commercial goods that have been ‘offered for sale’ but not sold. It also adopted open-ended data provisions that arguably permit the agency to request almost unlimited information to substantiate the reasonableness of prices. …
Between the McCain letter and the NDAA, Congress could not have been clearer that the goal is to create a less–not more–burdensome process for commercial item contracting. Maybe rescinding the proposed rule is the DoD’s first step towards listening?
Or, as the attorneys at the firm Wiley Rein wrote—
The Department of Defense (DOD) has withdrawn a proposed rule that would have effectively narrowed the standards under which an item qualifies as ‘commercial’ and that would have broadly expanded the type of information required to determine price reasonableness. As we previously reported, the proposed rule was intended to implement Section 831(a) of the Fiscal Year 2013 (FY13) National Defense Authorization Act (NDAA), which required DOD to issue guidance regarding the submission of other than certified cost or pricing data for commercial item acquisitions. The proposed rule followed recent DOD Office of Inspector General reports on pricing in commercial item acquisitions, which raised concerns that Contracting Officers had not analyzed sufficient pricing information to determine that the prices of certain sole source commercial item products were fair and reasonable. The proposed rule generated significant negative comments, including from the American Bar Association’s Section of Public Contract Law. With little fanfare, DOD closed the DFARS case on the proposed rule and incorporated the FY13 NDAA issues into a new DFARS case that will address both Section 831(a) of the FY13 NDAA and the commercial item provisions in the Fiscal Year 2016 (FY16) NDAA.
Next up is the similarly ill-conceived proposed rule on curbing the freedom contractors currently enjoy to initiate “independent” R&D projects. This is the Kendall-sponsored, BBP-enabled, attempt to make contractors’ IR&D spend unallowable unless they share their individual IR&D projects’ “goals and plans” with somebody in the Pentagon (somebody currently unidentified), and the contractors can prove they shared that highly proprietary information. If the contractors failed to share the required information—or if they cannot document to the auditors’ satisfaction that they did so—then their IR&D costs will be considered to be unallowable.
Isn’t that special?
In one of the quotes posted above, the attorneys thought the withdrawal of the proposed commercial item rule might be DoD’s “first step toward listening” to the clamor of Congress and industry demanding regulatory roll-backs instead of regulatory additions. We beg to differ. If DoD policy-makers were actually listening, the proposed IR&D rule would have been closed as well. Instead, the current DFARS Case status report (dated December 7, 2015) shows that DFARS Case 2016-D002 (“Enhancing the Efficiency of Independent Research and Development”) is still in process. Indeed, the proposed rule has been drafted and is in review by the DAR Editor.
So as you can see, Pentagon policy-makers—led by Frank Kendall and Shay Assad in particular—continue to ignore the desires of industry and Congress and they continue to pile on regulatory requirements that lead to additional contractor costs, costs that get passed-on to the taxpayers.
But why listen to us?
Sandra Erwin, writing in NDIA’s National Defense magazine, offers much the same opinion. She wrote—
The business reforms proposed by every defense secretary during the Obama administration will continue to be debated but there is little to no chance that significant actions will happen until after the nation elects a new president, defense industry experts said. … The Senate Armed Services Committee started a series of hearings this year -- expected to extend into 2016 -- that have cast a spotlight on defense reforms. SASC Chairman Sen. John McCain, R-Ariz., has chided officials for what he characterized as gross inefficiencies and wasteful business practices at the Department of Defense. The committee is looking at how Congress and the Pentagon might go about restructuring bloated agencies and reducing overhead in order to cut costs and speed up the pace of innovation. …
One of the efficiency initiatives proposed by Gates in the early days of the Obama administration targeted the so-called ‘back offices’ of many defense agencies and combatant commands. Sweeping reforms of this sort are always tough, said McKinley. ‘It is very hard to change the culture [and get support for] divesting significant portions of staff that have been built up over time.’ The National Guard Bureau staff, for instance, grew from 450 in the 1980s to 4,000 today. The department is going to need leadership that ‘watches the personnel 'shell game,'’ said McKinley.
Eaglen warned that continuing procrastination is bad news for the military. Without reforms, the Pentagon is going to have to continue to absorb rising overhead and infrastructure costs within a flat top-line budget, she said. ‘There isn't an additional dollar for defense without a reform agenda.’
The Obama years have been marked by constant battles between the White House and various factions in Congress over federal spending, and there is no longer a dominant bloc on Capitol Hill that will push for bigger defense budgets, she said. … The same political gridlock that led to the Budget Control Act and abrupt reductions in military spending also has stalled personnel reforms that are needed to preserve the health of the all-volunteer force, Carter said. Initiatives to adjust compensation, healthcare and retirement benefits have lacked the consensus to move forward, so ‘we are locked in the status quo,’ he said.
In the very same edition of the magazine, Ms. Erwin opined that what acquisition reform efforts have been implemented have led to unintended consequences, including “a realignment of the industry in ways that could squeeze the government's purchasing power.” Citing a study, Ms. Erwin argued that the implementation of LPTA (Lowest Price, Technically Acceptable) procurements “have commoditized many products and services, sparking a wave of corporate consolidations and spinoffs as some defense contractors have moved to unload their less-profitable service businesses.” In addition, “’Agency reliance on LPTA has inadvertently fueled monopoly positions for larger contractors while squeezing contractors and suppliers in the middle of the supply chain,’ the Govini report says.” Which is great news for Lockheed Martin, to be sure; but perhaps not so great news for contractors in the $100 Million to $1 Billion revenue range.
Let’s wrap this up. We think we’ve adequately supported our initial assertion, which is that the Obama Presidency may be remembered for many things—and one of them is going to be its failure to implement meaningful acquisition reform. We believe that the verdict of history will not be kind to President Obama in that regard.
External Peer Review Report on the Defense Contract Management Agency Office of Independent Assessment Internal Review Team
On November 2, 2015, the Department of Defense Office of Inspector General issued audit report number DODIG-2016-007. In that report, the DoD OIG issued its opinion after reviewing “the system of quality control for the Defense Contract Management Agency’s Internal Review Team.” The DoD OIG review “was conducted in accordance with Government Auditing Standards and the Council of the Inspector Generals on Integrity and Efficiency Guide for Conducting Peer Reviews of the Audit Organizations of Federal Office of Inspector General.”
As part of its review, the DoD OIG audit team reviewed three of nine audit reports issued by the DCMA’s Internal Review Team during the period, for a 33% sample. In its review, the DoD OIG audit team “tested compliance with the requirements for continuing professional education hours” and they “interviewed personnel to determine their understanding of and compliance with quality control policies and procedures.” In addition, the DCMA Internal Review Team’s audit policies and procedures, which were issued in May, 2013, were reviewed.
Based on that methodology and scope, the DoD OIG issued an opinion stating that “the system of quality control for the Defense Contract Management Agency’s Internal Review Team in effect for the year ended May 31, 2015, has been suitably designed and complied with to provide the audit organization with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects.”
In other words, the DCMA Internal Review Team received a rating of “pass” from the DoD Office of Inspector General’s independent external peer review.
See DCAA? It doesn’t have to be that difficult.
Oh, wait. You say DCAA issues more than nine audit reports in any given year, and thus has many more chances for noncompliance? You say DCAA has many more auditors than the DCMA Internal Review Team, and thus has many more chances for any given individual to give a wrong answer during an interview?
Yes, all that is true. DCAA has many more opportunities to fail its independent external peer review.
And yet, the fundamental requirements applicable to both the DCMA Internal Review Team and DCAA are very much the same.
The requirements are the same, but how each DoD agency chooses to comply with those requirements is quite different. One DoD agency keeps it simple and passes easily; whereas the other DoD agency has interpreted GAGAS in such a way that passing is much more difficult.
Which approach makes more sense? The answer to that question will be left as an exercise for the reader.
|
Root Cause Analysis
Sometimes you eat the bear; sometimes the bear eats you.
 On those dark days when the bear eats you, it’s always worthwhile to understand how it happened, so as to reduce the probability of future occurrences. Sometimes this inquiry is called “lessons learned” or “root cause analysis.” The inquiry into what went wrong is always beneficial, even if it delves into politically sensitive areas. But the inquiry is nothing but wasted time unless the results are used to drive change. If there are no behavioral or process changes, then why bother?
That said, some level of lessons learned analysis is actually mandated by regulation. Readers know (or should know) that the Contractor Business Systems discussed in the Defense Federal Acquisition Regulation Supplement (DFARS) have “adequacy criteria” that must be complied with in order to have a business system determined to be adequate (or to be approved). Readers know (or should know) that a business system that is inadequate (or disapproved) may lead to undesirable consequences, including (in some cases), payment withholds.
With that thought in mind, readers should note that one of the adequacy criteria for a contractor’s Estimating System requires a lessons-learned inquiry. Contractors that have defense contracts that include the DFARS clause 252.215-7002 (“Cost Estimating System Requirements”) are required, by that clause, to implement an estimating system that (among other things) “require[s] management review, including verification of compliance with the company's estimating and budgeting policies, procedures, and practices; provide[s] for internal review of, and accountability for, the acceptability of the estimating system, including the budgetary data supporting indirect cost estimates and comparisons of projected results to actual results, and an analysis of any differences; [and] provide[s] estimating and budgeting practices that consistently generate sound proposals that are compliant with the provisions of the solicitation and are adequate to serve as a basis to reach a fair and reasonable price.”
Thus, in order to actually have an adequate and compliant estimating system, several layers of management review must take place—including “comparisons of projected results to actual results, and an analysis of any differences.” Granted, that’s not exactly a full-on “lessons learned” or “root cause” analysis, and there is no express requirement to perform post-mortems on failed proposal efforts to try to figure out what went wrong and to identify the required improvements to militate against the risk of future proposal failures—but we strongly suggest that such additional analyses are at least implied in the fundamental requirement. And if they are not implied, they should be. Why would a contractor choose not to perform analyses on failed proposal efforts in the hopes of winning work on the next opportunity?
The correct answer: a savvy contractor would never choose to close its eyes to what went wrong and would scrutinize its process so that it could do better next time around. Unfortunately, the correct answer is not given 100 percent of the time and too many contractors persist in generating proposals in a less-than-optimum manner because that’s the way they’ve always done it; and when they lose it’s never the process that’s blamed. Instead, too often it’s Tom or Dick or Joe or Jane that’s blamed, because it’s easier to blame a person than to admit the process itself (which is the responsibility of leadership) was the real culprit.
Too many times, the answer is that there are multiple reviews, each one very bureaucratic and time-consuming; each one full of brilliant management insights that are offered far too late in the proposal process. There are Red Team Reviews and Green Team Reviews and Blue Team Reviews and Puce/Fuchsia Reviews. There are enough proposal reviews to fill an entire large Crayola crayon box of colors—and the last thing anybody on the proposal team wants is yet another review, even if it would be in their best interests to participate in it.
Too many times, those multiple management reviews are superficial or focused on the wrong issue. The customer solicitation tells the proposal team what’s important, whether it be price or technical or past performance or socioeconomic participation, but the reviewers tend to focus on what they know rather than what the customer is telling them is important. And it’s always price, isn’t it?
In thirty years of proposal preparation and review, price is always a key topic. At what price will the other bidders submit, and where will we be against that number? What’s the customer’s budget? What’s the price pain point? How low can we go? Can we price this project at a loss and make it up on the overall program? (Which is what Boeing did on its successful KC-46 Tanker bid.)
And the price is never low enough, is it? How many times have you heard a marketing person say, “The price is too low—add more!” The answer is, sadly, almost never. Instead, the price is always too high and it needs to come down. “Price to Win” or P2W is a common refrain in most proposal reviews.
The thing of it is, if your technical approach is no good then your price is irrelevant. In a comparison of two equivalent technical approaches, the low price bidder has a tendency to win—especially in these days of “Low Price Technically Acceptable” or LPTA competitions. But if there is a clear technical winner, in a competition where technical approach is more important than price, then if your technical approach is inferior you will tend to lose, even if your price is significantly lower.
A good example in support of that assertion is found in a recent bid protest decision at the Government Accountability Office (GAO) in the matter of Raytheon Company (Space and Airborne Systems). (We used to work there and we still have friends there, so there is nothing happy about using SAS as the poster child in this article, but the fact is that it was this bid protest decision that sparked the article—so there you go.)
TL;DR Summary:
Raytheon Company, Space and Airborne Systems, of El Segundo, California, protests the issuance of a task order to Northrop Grumman Systems Corporation, of Linthicum, Maryland, by the Department of the Army, under request for task order execution plan (RTEP) No. R2-3G-0823, issued to holders of the Army’s Rapid Response-Third Generation multiple-award contract, for the purpose of prototyping, designing, integrating and testing a Synthetic Aperture Radar/Ground Moving Target Indicator (SAR/GMTI) long range radar. Raytheon alleges that the Army’s technical evaluation was unreasonable, principally because the Army conducted inadequate and misleading discussions.
We deny the protest.
Without rehashing the 10-page decision, let’s focus on one table that we think tells the story.
|
Offeror
|
Technical Rating
|
Past Performance Confidence
|
Revised Cost Proposal
|
Evaluated/ Probable Cost
|
|
Northrop
|
Outstanding
|
Substantial
|
$23,066,341
|
$23,066,341
|
|
Offeror B
|
Acceptable
|
Substantial
|
$16,329,553
|
$16,329,553
|
|
Raytheon SAS
|
Unacceptable
|
Substantial
|
$19,608,932
|
N/A-Not Evaluated
|
The table above shows that Raytheon’s offered price was significantly lower than Northrop’s offered price but its technical rating was dramatically worse. Raytheon received an “unacceptable” technical rating versus Northrop’s “outstanding” rating. Accordingly, Raytheon’s offered price was irrelevant. Indeed, Offeror B’s price was lower than both Raytheon and Northrop, but it didn’t win because Northrop’s “outstanding” trumped Offeror B’s “acceptable” technical rating.
As the GAO decision summarized—
In the SSDD, the source selection authority (SSA) concluded that Northrop’s technical proposal was significantly superior to that of Offeror B, due to a ‘combination of a significant strength and multiple strengths, higher level of detail, lower-risk approach, and exceptional understanding’ of the PWS requirements. In the final tradeoff analysis, the SSA concluded that Northrop’s and Offeror B’s proposals were superior to Raytheon’s, as Raytheon’s technical proposal was unacceptable. Between the remaining two proposals, the SSA concluded that Northrop’s proposal, when taken as a whole, was superior to Offeror B’s proposal and represented the best value to the government.
We don’t know why Raytheon’s proposal was deficient. It’s hard to argue that Raytheon isn’t a global leader in the defense radar marketplace. So what happened? We certainly don’t know. The point of this article is: Raytheon SAS needs to understand why it missed the mark. Raytheon SAS needs to conduct a candid and detailed analysis of its proposal process and the reviews of its technical approach. Raytheon SAS needs to do the root cause analysis if it wants to retain its top position in the defense radar market.
We would argue the analysis should take place even if Raytheon won the competition. We assert that a lessons-learned analysis should be a routine process step for every single proposal submitted. We believe it should be systemically ingrained into the proposal preparation process—and indeed the culture of every Federal contractor.
But on those days when the bear eats you, it is vital to understand how it happened, so as to avoid being somebody’s lunch again.
Interim FAR Rule Redefines “Responsible” Federal Contractor
If you are—or want to be—a Federal contractor and your tax returns have all been submitted, and you have no additional tax assessments that the IRS alleges you owe, and you have never been convicted of a Federal felony, you are fine and can receive a new Federal contract award.
But if you are—or want to be—a Federal contractor and your tax returns are overdue, or the IRS has alleged you owe additional taxes, or you have been convicted of a Federal felony, then you will have difficulties in being determined to be a “presently responsible” organization and you may not be able to receive a new Federal contract award.
That’s the deal with the recently promulgated interim FAR rule entitled “Prohibition on Contracting with Corporations with Delinquent Taxes or a Felony Conviction.” The new interim rule creates two new Representations/Certifications: 52.209-11 (“Representation by Corporation Regarding Delinquent Tax Liability or a Felony Conviction under any Federal Law”) and 52.209-12 (“Certification Regarding Tax Matters”).
Basically those new Reps/Certs create additional requirements that define when a contractor is “responsible” and we all know that only “responsible” contractors can receive Federal contract awards. Thus, this is kind of a big deal.
If you are an organization that might have some skeletons in your closet that would tend to lead to you mark the “wrong box” in one or the other of the new Reps/Certs, all is not lost. According to the background information published along with the interim rule, you will not be automatically excluded. For example, with respect to a “wrong answer” on the 52.209-11 Representation, the rule states—
When an offeror provides an affirmative response in paragraph (b)(1) or (2) to the representation, the contracting officer is required to request additional information from the offeror and notify the agency official responsible for initiating debarment or suspension action. The contracting officer shall not make an award to the corporation unless an agency suspending or debarring official has considered suspension or debarment of the corporation and determined that this further action is not necessary to protect the interests of the Government.
Similarly, with respect to the 52.209-12 Certification, the rule states—
If the certification regarding tax matters is applicable, then the contracting officer shall not award any contract in an amount greater than $5,000,000, unless the offeror affirmatively certified in its offer to all the required certifications regarding tax matters in FAR Clause 52.209-12(b).
So there are some escapes built into the new rule. But to be safe, we strongly suggest Federal contractors take all necessary steps to avoid having to submit a “wrong answer,” because it’s going to create problems for you and your Contracting Officer when it comes time to be considered for a new contract award.
|
