National Defense Authorization Act – GFY 2016 Version 2
President Obama vetoed the first version of the GFY 2016 NDAA and so a second version was submitted. As far as we can tell, the second version will become public law.
As has become a happy tradition, Bob Antonio’s wonderful WIFCON site has published an analysis of the NDAA. You need to review it. You need to review it because the NDAA provisions become DFARS regulations, as the DAR Council receives its marching orders (or many of them) from Congress via the NDAA. Thus: it is important to read the NDAA language if you want to see what’s coming your way.
Here are some provisions we found interesting. There are more, of course. But we are bringing just a few to your attention, a foretaste of the contents, if you will.
Section 809 directed the Under Secretary of Defense (AT&L) to establish “an advisory panel on streamlining acquisition regulations.” Let’s all hope that goes better than the BBP-directed effort to roll-back non-value-added rules and regulations (which we’ve recently written about).
Section 812 eliminated the applicability of TINA to offset agreements, except for offset agreements that relate to “contract or subcontract under the offset agreement for work performed in such foreign country or by such foreign firm that is directly related to the weapon system or defense-related item being purchased under the contract.”
Section 828 imposed a penalty for cost overruns on major defense acquisition programs (MDAPs). The offending military service will have to pay 3 percent of the overrun, the amount of which will be taken from the service’s RDT&E budget. We are sure this provision will have no impact on a military service’s willingness to take a risk on unproven technology in order to obtain an innovative and game-changing new weapon system. (Note: sarcasm.)
Section 844 directed SECDEF to ensure mandatory training in how to conduct market research.
Section 851 appeared to formalize the prior DoD decision to centralize the determinations of what is and what is not a commercial item. We would like to think that decision would not be necessary if acquisition professionals had received (or were going to receive) mandatory training in how to conduct market research, but what can you do?
Section 854 required the “establishment of a list” in the DFARS of “inapplicable defense-unique statues to contracts for commercial items and commercial available off-the-shelf items.” Didn’t we already have this in the FAR and DFARS? We thought DFARS 212.503 and 212.504 already listed laws that “are not applicable to contracts for the acquisition of commercial items.” Guess we were wrong about that.
Section 873 implemented a pilot program “to provide an exception from the requirements under sections 2306a(1) and 2313 of title 10, United States Code, for contracts or subcontracts valued at less than $7.5 million that are awarded based on a technical merit based selection procedure.”
Section 885 modified existing rules regarding counterfeit electronic parts “to expand the eligibility for covered contractors to include costs associated with rework and corrective action related to counterfeit electronic parts as allowable costs under Department of Defense contracts.” This would seem to be good news.
Section 887 required the FAR Council “to prescribe a regulation making clear that agency acquisition personnel are permitted and encouraged to engage in responsible and constructive exchanges with industry, so long as those exchanges are consistent with existing law and regulation and do not promote an unfair competitive advantage to particular firms.” Guess that OFPP “myth-busting” memo wasn’t getting the job done.
Section 893 is entitled “Improved Auditing of Contracts” and this is the one that prohibits DCAA from providing audit services to civilian agencies until it gets its incurred cost audit backlog down to a reasonable level (defined by the provision as being 18 months’ worth). An early version would have required the SECDEF to use “outside auditing staff to help address DCAA’s audit backlog,” but that bit did not seem to make it into the language of the final bill sent to President Obama. We’ve already done an article on the early version, and we’ll have more on this provision as events develop.
Section 896 required the SECDEF to survey “defense contractors with the highest level of reimbursements for cost-type contracts” to determine “the cost to industry of regulatory compliance with government unique acquisition regulations and requirements that are not imposed on commercial item contracts.” It’s like the 1990’s all over again, isn’t it? Only in 2016 Coopers and Lybrand won’t be around (by that name) to conduct the study. Let’s hope SECDEF Carter doesn’t give this one to the same BBP folks who released that pathetic study to the USD (AT&L).
Section 899 would seem to raise the TINA threshold to $5 million (for certain contracts under certain conditions) under a pilot program to demonstrate the efficacy of “using risk-based techniques in requiring submission” of certified cost or pricing data. Quite frankly, we’re not entirely sure what the provision requires. What do you make of this language? “The head of an agency shall establish a risk-based sampling approach under which the submission of certified cost or pricing data may be required for a risk-based sample of contracts, the price of which is expected to exceed $750,000 but not $5,000,000. The authority to require certified cost or pricing data under this paragraph shall not apply to any contract of an offeror that has not been awarded, for at least the one-year period preceding the issuance of a solicitation for the contract, any other contract in excess of $5,000,000 under which the offeror was required to submit certified cost or pricing data under section 2306a of title 10, United States Code.”
The foregoing was simply a high-level summary of some of the provisions that caught our eyes. Again, we recommend readers head over to WIFCON and review the entire NDAA themselves. And stay tuned to see how the FAR Councils and DAR Council tackle some of the Congressionally mandated initiatives that they’ve been handed.
An Example of Requirements Reduction
 Recently we posted an article discussing our disappointment with a report issued by the Office of the Under Secretary of Defense (Acquisition, Technology and Logistics) that was intended to make recommendations to the USD (AT&L) and other Pentagon leaders regarding areas in which non-value-added requirements could be reduced so as to obtain a commensurate reduction in contractors’ indirect expenses. We were disappointed in the paucity of recommendations and the extensive effort made to justify the status quo.
One small recommendation1 for a regulatory reduction escaped the overwhelming bulwarks erected to support the current regulatory regime: the study team agreed with the contractor recommendation that DoD should reduce the requirements to make multiple submissions of cost or pricing (“CoP”) data that are made simply to ensure that such data are “current.” The study team wrote (at pages 89 – 90 of the report) –
We concur with contractors’ recommendation in the first category: DoD should clarify policy guidance to reduce repeated submissions of CoP data. Multiple submissions are an unintended, and generally unsought, consequence of the FAR requirement that certified CoP data be ‘current.’ Frequent resubmissions appear to be the result of contractors’ fears that out of date CoP data that becomes inaccurate will lead to defective pricing claims by DoD post-award. However, lack of clarity on what is considered ‘current’ motivates some contractors to provide excessively frequent CoP data updates during negotiations (weekly or monthly), which creates unnecessary work not only for contractors, but also for the Procuring Contracting Officer (PCO). We recommend amending DFARS (and/or the FAR) to remove uncertainty about the appropriate frequency of providing certifiable CoP data to ensure it remains ‘current’ and/or to clarify pricing changes that warrant resubmission of CoP data. … Reducing unnecessary resubmissions of certifiable CoP data would lower contractor proposal costs and reduce procurement administrative lead time. Making this change also weakens the argument for making additional changes to the TINA statute, such as increasing thresholds or relaxing waiver criteria.
There were four alternate approaches put forward that might, if implemented, reduce the contractor burden associated with complying with TINA (or what is now called “Truthful Cost or Pricing Data”) requirements. One of those proposed approaches was described as follows: “Reinstitute practice from 1980s that provided contractors the option to voluntarily disclose defective pricing data post-award and provide DoD with refunds (including interest), without risk of initiating defective pricing claims and associated audits.”
Somehow (and we are not sure exactly how) that contractor recommendation “evolved” into the following recommendation to the Director of Defense Pricing: “Consider revising the FAR to eliminate the requirement that a defective pricing claim and associated audit must be initiated if a contractor voluntarily discloses defective pricing post-award …”
Again, how the study team got from “reduce multiple submissions of CoP data” to “give contractors an option to voluntarily disclose defective pricing without risk of initiating defective pricing claims and associated audits” is a mystery but, clearly, a key step to implementing that evolved recommendation would be to eliminate the regulatory requirement that claims and audits must be initiated if a contractor voluntarily discloses defective pricing—i.e., a failure to comply with the requirements of Truthful Cost or Pricing Data (which used to be known as the Truth-in-Negotiation Act or TINA).
So, yeah. We guess.
Even though the recommendation was to revise FAR 15.407-1(c), the Director of Defense Pricing initiated a DFARS Case that would only revise DFARS 215.407-1. In other words, DoD was going to modify what it could control, not what the study team actually recommended. The fact that revising the DFARS without revising the FAR requirement would leave Contracting Officers (and contractors) still subject to the FAR requirement—and thus would not lead to any significant cost reductions whatsoever—would only matter if you accepted that the purpose of the roll-back in regulatory requirements was to actually reduce the contractors’ burdens. If you ignore that fundamental objective (which was documented in BBP 2.0 and 3.0), then the proposed DFARS revision seems like an important victory.
Thus, we have DFARS Case 215-D030 and its proposed DFARS rule revision, now out for public comment. You already know what we think of it – just read the foregoing. And guess what? We think even less of it than we did before we read it, because it proposes to accomplish even less than the already watered-down recommendation submitted to the Director of Defense Pricing. In the words of the Federal Register summary—
DoD is proposing to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to stipulate that DoD contracting officers shall request a limited-scope audit, unless a full-scope audit is appropriate for the circumstances, in the interest of promoting voluntary contractor disclosure of defective pricing identified by the contractor after contract award.
There you go.
Did you notice that the already-evolved recommendation to eliminate the requirement to have mandatory claims and audits upon receipt of a contractor’s voluntary notification of defective pricing “evolved” again, so that now the regulatory requirement would be to initiate a mandatory “limited-scope audit” – but only and we mean only if a full-scope audit was deemed not to be appropriate. How would a Contracting Officer know whether to initiate a full-scope or a limited-scope audit? Well, the proposed rule says “To determine the appropriate scope of the audit, the contracting officer should consult with Defense Contract Audit Agency (DCAA).”
Moreover, the proposed rule would, if implemented as drafted, declare that “Voluntary disclosure of defective pricing does not waive the Government's rights to pursue defective pricing claims on the affected contract or any other Government contract.”
What, then, are the benefits associated with this proposed rule?
-
Contractors can’t reduce system requirements or labor involved because the FAR wasn’t revised.
-
Contractors will still face DCAA audits, should they make voluntary disclosures of defective pricing.
-
The Government may still initiate a claim against the contractor as a result of any voluntary disclosures made.
In other words, none. There is no benefit associated with this proposed rule. It is a sham, readers. A sham perpetrated on the defense industrial base by entrenched bureaucrats eager to perpetuate the status quo, despite direction from Pentagon leadership (and Congress) to cut down regulatory requirements that lead to contractors’ increased overhead rates.
We all know this is a sham. If anybody were interested in actually rolling-back the requirements and cutting down overhead costs, then the original recommendation—which was to eliminate the repetitive (and expensive!) submissions of cost or pricing data that contractors make in order to maintain the “currency” of the data, lest somebody accuse the contractor of defective pricing—would have been implemented. We’ve shown you here today how the original recommendation was watered-down and diffused and forced into something that is barely recognizable as the descendant of the original. Something that will, if implemented as drafted, reduce no requirements and decrease no overhead.
Which is why, dear readers, this is a perfect example of how the Pentagon bureaucracy implements a reduction in requirements via regulatory revision.
Comments on the proposed rule should be submitted in writing before January 19, 2016, to be considered in the formation of a final rule. Click the link above to be taken to the Federal Register notice that lists addresses available to receive public comment.
1 In fairness, there were other recommendations for regulatory roll-back. But there were not very many of them and very few of the recommendations were, in our estimation, significant.
|
University of Florida Pays $20 Million for Failing History Lessons
 In 1994, Stanford University paid $1.2 million to the U.S. Navy, to settle allegations that it had “overcharged the government for research overhead for 12 years,” according to one contemporaneous news report. That same article noted that the settlement settled years of rancorous dispute, which included a lawsuit alleging that Stanford owed $250 million for such no-nos as “depreciation of a 72-foot yacht, a steady supply of fresh flowers for [Stanford President] Kennedy's residence and upkeep of the mausoleum where the founding Stanford family is buried.” The fact that the Navy accepted a token $1.2 million settlement offer is testimony to the weakness of its case, but that didn’t stop Kennedy from resigning under fire.
The settlement did not end the relator’s qui tam suit against Stanford, which continued even though the Department of Justice declined to intervene. As this press release noted, “The Justice Department chose not to join the suit after it investigated for more than two years, during which the university responded to 11 subpoenas for information and provided 150,000 pages of documents.” Four years later, the Ninth Circuit of the Court of Appeals ruled that the relator, a former Naval employee, was not eligible to bring a suit under the False Claims Act. Why? Because the relator, Mr. Paul Biddle, was the Navy’s Contracting Officer. The court found that an employee in such a situation "should not collect a windfall for merely doing his job." Mr. Biddle pursued his crusade against Stanford for roughly eight years before his suit was finally rejected.
The ruling – that a government employee cannot separately pursue a False Claims Act suit and profit thereby when it is his or her job to protect the taxpayers’ interests – was so important at the time that it still resonates, more than 20 years later.
What also still resonates, more than 20 years later, was the pain and indignity heaped upon Stanford University, which is one of the nation’s premier institutions of higher education. As noted, the University President was forced to resign. In addition (according to this summary),
The revelations led to embarrassing Congressional hearings, at which lawmakers ridiculed the university for having included a portion of the cost of questionable items including the depreciation of a yacht, flowers, and furniture for the former president's residence on its bills to the government for research overhead. Stanford withdrew those charges before the hearings, but after Congress had begun its inquiry. … The government substantially lowered Stanford's rate for overhead reimbursements. The institution conceded that it had made accounting errors and inappropriate charges, but said it had not intentionally overbilled. … The scandal eventually engulfed other research universities and led to a series of moves by the government to tighten the rules for reimbursing colleges for research costs.
The point is, even though this all happened long ago, it was an important case with far-reaching implications—not only for Stanford but also for “other research universities.” This was a big deal at the time and it led to a “tightening” of the rules related to how colleges and universities are reimbursed for indirect costs allocated to research contracts and grants. Everybody was supposed to learn a lesson from the pain and indignity heaped upon Stanford University.
And now it appears that the University of Florida forgot the lesson.
We know this because of a recent DoJ press release that announced that the University of Florida had agreed to pay just a hair under $20 million to settle allegations that “the university improperly charged the U.S. Department of Health and Human Services (HHS) for salary and administrative costs on hundreds of federal grants.” According to the announcement—
The University of Florida receives millions of dollars in grant funding from HHS on hundreds of grants each year. The settlement announced today resolves the alleged misuse of grant funds awarded by HHS to UF between 2005 and December 2010. The United States contended that the university overcharged hundreds of grants for the salary costs of its employees, where it did not have documentation to support the level of effort claimed on the grants for those employees. The government also contended that UF charged some of these grants for administrative costs for equipment and supplies when those items should not have been directly charged to the grants under federal regulations. Lastly, UF allegedly inflated costs charged to HHS grants awarded at its Jacksonville campus for services performed by an affiliated entity, Jacksonville Healthcare Inc.
So the issues were: (1) timekeeping/labor accounting problems, (2) direct versus indirect charging, and (3) transfer pricing of inter-organizational transfers. You might say that those were different issues than those faced by Stanford 20 years ago, and you’d be right. But that argument misses the point: research universities were put on notice 20 years ago that the government would audit and scrutinize charges to contracts and grants and, as a result, those research universities would have to be vigilant to ensure that they were strictly complying with applicable rules and regulations.
The lesson was clearly communicated and many recipients of federal funds heard it loud and clear. But either the University of Florida never received the message, or else it forgot the lesson over the passage of time. As a result, the University and its faculty and students are now $20 million poorer.
USD (AT&L) Disappoints with Notions for Regulatory Roll-backs
We have been less than enthusiastically supportive of the various incarnations of “Better Buying Power” (BBP). It’s not that we don’t support acquisition reform—we do! It’s just that so much of the BBP efforts strike us as bureaucratic B.S. designed to show effort without any measurable situational improvement. You can search this blog (we have a keyword search feature up in the top right of the home page!) and see our many articles on the topic. You’ll see that we’ve been following the various BBP initiatives closely and we have some ideas on what efforts are substantive, and what efforts are less so.
One of the more promising efforts has been to “remove unproductive requirements imposed on industry.” The specific actions under this initiative were detailed in this article found on our knowledge resources page (members only). This is a BBP 3.0 initiative that was a carry-over from BBP 2.0, where it was called “eliminate requirements imposed on industry where costs outweigh benefits.” To achieve that objective, BBP 2.0 called for DoD to “work with industry to collect data that will enable the Department to identify requirements that can be reduced or eliminated to reduce cost without adversely affecting performance.” The BBP 2.0 initiative was a carry-over from BBP 1.0 (or “Better Buying Power” as it was called in 2010 when it was rolled-out by then-USD (AT&L) Dr. Ash Carter). In BBP 1.0, it was called, “Identify and eliminate non-value-added overhead and G&A charged to contracts.”
The point is, the Pentagon has been pursuing this initiative for five years, in every single Better Buying Power incarnation. Since 2010, no matter how worded, the consistent goal has been to reduce the cost of weapons and services by reducing contractors’ overhead costs, and to drive that overhead cost reduction through a reduction in requirements imposed on contractors.
Five years’ of effort devoted to this initiative. During that five-year period, we’ve changed the Secretary of Defense, we’ve change the Under Secretary of Defense (Acquisition, Technology and Logistics), we’ve changed the Director of Defense Procurement and Acquisition Policy, we’ve changed the Director, DCMA, we’ve changed the Director, DCAA, and we’ve changed the OFPP Administrator. Despite those changes, the DoD bureaucracy under the USD (AT&L) has doggedly pursued this initiative for five years.
And so how’s that working out for the Pentagon and the taxpayers?
After five years, we finally have an answer, as the office of the USD (AT&L) recently issued a report showing the results of the five-year efforts.
The report, called “Eliminating Requirements Imposed on Industry Where Costs Exceed Benefits,” is a huge disappointment.
Before we get into the whys and wherefores, let’s pause and acknowledge that perhaps we should have been expecting such a stinker, such a waste of $600,000. Perhaps we should have expected the bureaucracy to spend most of its efforts waving-off contractor suggestions for regulatory relief and justifying the status quo. After all, Godel theorized that no formal complex system will ever be complete, and no management activity within the boundaries of that formal complex system can conceive of the unknowns that lie outside it. Thus, asking the bureaucrats within the bureaucracy to design a new bureaucracy is always going to be a difficult, if not impossible, proposition.
Yet, despite knowing the difficulty of asking bureaucrats to reduce the bureaucracy that keeps them employed, we were still mightily disappointed at the results of the study.
The report is divided into five primary sections: (1) acquisition of commercial items, (2) contract auditing and management, (3) application of earned value management, (4) Truth in Negotiation Act (TINA) and requirements for Cost or Pricing Data, and (5) application of the Buy American Act.
-
Acquisition of Commercial Items. Areas covered included the initial determination of commerciality, determining that prices paid for commercial items were fair and reasonable, and government source inspection of commercial items during manufacturing. Even though the DoD study team was provided with real-life examples in which the government demonstrably paid more, and took longer, to acquire commercial items through adherence to its bureaucratic processes, the report concluded that “The examples provided were insufficient to support a quantitative, generalizable cost/benefit assessment of DoD’s policies and practices for acquiring commercial items.” In fact, the study team doubled-down on DoD’s controversial proposal that would make it even harder and more bureaucratic to acquire commercial items. To support the status quo, the DoD will create more bureaucracy (Centers of Excellence), develop more process guidance, and will train its Contracting Officers better.
-
Contract Auditing and Management. Contractors provided a number of recommendations in this area, but failed to provide “quantitative costs associated with specific inefficiencies associated with DCAA auditing or DCMA contract management” and, thus, no cost/benefit analysis of those recommendations was possible. Instead, the study team parsed those recommendations into “most promising” and “other” based on “a subjective assessment of their merit.” The “other” recommendations were not considered. The “most promising” recommendations were dismissed. For example, contractors said that certain Contractor Business System reviews could be streamlined if government reviewers would rely on the work performed by external auditors during Sarbanes-Oxley (SOX) control system reviews. DCAA (sort-of) agreed, but stated that it would need access to the external SOX reviewers’ working papers in order to rely on them. That ain’t going to happen, mostly because those working papers are the property of the external reviewers and not the contractors, and the government lacks privity. Separately, much verbiage was directed at reducing DCAA’s backlog of incurred costs audits. DCAA defended itself and pointed to all the progress it has made since 2012 via use of its risk-based approach. (Figure 3.1 shows that, as of May 2015, DCAA’s incurred cost backlog had been reduced to 17,600 years, which was allegedly only 170% of the “regular inventory” of 10,300 years.) In addition, contractors recommended changes to FAR 4.703 retention requirements related to scanned images, but the study team concluded that the current requirement “seems reasonable” and therefore did not need to be eliminated. Other contractor recommendations were similarly dismissed, with DCMA, PARCA, and DCAA each (generally) supporting the other’s rationale for why a particular contractor recommendation was already been addressed. For example, footnote 38 on Page 36 states “PARCA: DCAA’s comment indicates they have been responsive to industry concerns on this issue and are open to addressing contractor concerns about multiple requests for information as they are made aware of such instances. If systemic issues remain, recommend that contractors provide specific details and recommended actions to the Director, DCAA and the USD(C).” We could provide numerous other examples; readers are encouraged to review pages 34 to 41 of the report.
-
Application of Earned Value Management. This was a happy place, with the study team accepted several contractor recommendations and promising to incorporate the recent Class Deviation into DFARS (which would establish the EVMS review threshold at $100 million). DCMA also promised to scale-back EVMS and individual program implementations to better match levels established by the ANSI/EIA 748 guidelines. The study team also recommended that EVMS metrics (e.g., cost or schedule variances) not be included in award fee evaluations.
-
TINA and Requirements for Cost or Pricing Data. Contractors recommended reducing the number of submissions, increasing thresholds for applying TINA requirements, and relaxing the requirements associated with obtaining a TINA waiver. The study team agreed with the first recommendation, disagreed with the second (on the basis that DoD would pay higher prices and that would outweigh any cost reductions achieved), and sat on the fence with respect to the third recommendation. Many report pages were devoted to documenting the rationale for retaining the status quo.
-
Application of the Buy American Act (BAA). Contractors made three primary recommendations. None of the three were found worthy of implementation by the study team. The status quo is acceptable.
We were interested in the concluding paragraph of this massive study, which indicates that the report is simply Phase 1 of a multi-phase effort. The concluding paragraph states—
Phase II of this study will continue under the Better Buying Power 3.0 initiative: “Remove Unproductive Requirements Imposed on Industry.” Industry will again be invited to play a key role, both in selecting topics for examination as well as providing evidence, ideas, and alternate approaches to achieve mutually beneficial outcomes. Based on industry inputs, some areas under consideration for future study include: DoD’s Application of Low Price Technically Acceptable Criteria; Reducing Procurement Administrative Lead-Time for Contract Awards; Providing Greater Clarity on Intellectual Property Policies and Practices; Reducing Undefinitized Contract Actions; Limiting Flow-Down of FAR/DFARS Clauses; and Consistent Rules for Contract Sun-Setting.
Thus, in the time-honored way of all bureaucracies, more efforts will be undertaken in the efforts to reduce bureaucracy. We look forward to seeing the results of the Phase II efforts, as we are quite sure they will be as value-added as the results of the Phase I efforts.
All we know is, as taxpayers, we want our $600,000 back.
|
DCAA has had a problem with its backlog of unperformed audits for quite some time, dating back at least to 2009 when the audit agency made two fateful decisions: (1) DCAA was going to intentionally stop performing audits of contractors’ proposals to establish final billing rates (colloquially called “incurred cost audits”), and (2) DCAA was going to comply with GAGAS—as the agency interpreted it—even if it killed auditor productivity to do so. As a result of those two decisions, the backlog of incurred cost audits grew and grew and grew … to the point where we thought the audit agency would never catch up. Despite the growing backlog, DCAA insisted on continuing to use onerous audit procedures and in performing multiple levels of (redundant) reviews—to the point where agency metrics showed it took nearly three full years to audit one year’s worth of claimed costs.
