DoD Rethinks Proposal to Micro-Manage Contractors’ IR&D Efforts, Or Does It?
Readers may recall our reaction to DoD’s Better Buying Power 3.0. We were, in a word, alarmed.
We wrote –
 Rather than let the market dictate the appropriate level of contractor IR&D spending, the USD (AT&L) intends to reverse decades of ‘laissez faire’ market freedom and, instead, require centralized planning and control. The definition of ‘laissez faire’ is ‘abstention by governments from interfering in the workings of the free market’ and thus Mr. Kendall and Dr. Carter have declared their intention to overturn free market capitalism in favor of a Stalinist approach.
Our delicately phrased criticism notwithstanding, we were not alone in voicing concern with the proposed approach. CEOs of major defense contractors thought it was a poorly thought-out idea as well.
Recently, USD (AT&L) Kendall announced he was going to rethink his proposed IR&D management approach. This article summarized the new approach thusly—
Frank Kendall, undersecretary of defense for acquisition, technology and logistics, said he no longer planned to require companies to seek a ‘technical sponsor’ before beginning an internal research program but would instead propose they be required to brief an appropriate defense official before and after such work.
(Emphasis added.)
The article continued—
‘This should not constrain industry's freedom in any way that current regulations and statute don't already require, and it will have the benefit of ensuring more frequent and effective communication between industry and government,’ Kendall said in prepared remarks for a conference in Rhode Island. … He said the goal was to ensure that the research work done - and billed as overhead - was technically meaningful.
We found a copy of a White Paper (dated August 26, 2015) that purports to establish the new DoD IR&D management approach. The White Paper stated—
To ensure that a two way dialogue occurs between the Department and IR&D performing organizations and to provide for some minimum oversight of IR&D, the department believes that proposed new IR&D efforts should be communicated to appropriate DoD personnel prior to the initiation of these investments and that results from these investments should also be shared with appropriate DoD personnel. The intent of such engagement is not to reduce the independence of IR&D investment selection, nor to establish a bureaucratic requirement for government approval prior to initiating an IR&D project. Instead, the objective of this engagement is to ensure that both IR&D performers and their potential DoD customers have sufficient awareness of each other’s efforts and to provide industry with some feedback on the relevance of proposed and completed IR&D work.
That doesn’t sound too bad. Communication is always a good thing, right?
But then later in the White Paper, we came across this pernicious bit of mischief—
The intent is that by FY 2017, every new IR&D project will be preceded by an engagement with appropriate DOD technical or operational staff to ensure that the department is aware of the goals and plans for the effort and that Industry is informed of related ongoing efforts and future potential opportunities from the Department. To document that this interchange is occurring, beginning in FY 2017, DoD will require contractors to record the name of the government party with whom, and date when, a technical interchange took place prior to IR&D project initiation and to provide this information as part of the required IR&D submissions made to the Defense Technology information Center IR&D electronic portal (which is accessed through the Defense Innovation Marketplace (www.defenseinnovationmarketplace.mil)). Defense Contracts Management Agency and Defense Contracting Auditing Agency will use these DTIC inputs when making allowability determinations for IR&D costs. In order to effect this procedural change, I intend to direct the Defense Acquisition Regulations Council to draft an amendment to the Defense Federal Acquisition Regulation Supplement and begin the public rulemaking process.
(Emphasis added.)
Thus, in reality the “rethinking” is not a rethinking at all. It is the same approach, with all the attendant problems. Contractors who fail to “brief” the unspecified and unidentified DoD technical personnel run the risk that their IR&D expenditures will be determined to be unallowable.
Among the myriad problems associated with this proposed approach is the sheer volume of individual IR&D projects that will need to be “briefed” via technical interchange. Some of the larger contractors have literally hundreds of such projects going on at any given time. For those large contractors, the current requirement to input their project information into DTIC has become a bureaucratic process that adds no value but requires labor—labor that is charged to overhead and passed right back to the DoD buying commands via the contractors’ indirect rates. This approach, if implemented, will make things worse.
For example, who pays for the labor and materials associated with the technical interchange briefings? We don’t think it should be IR&D, because the IR&D effort could take place whether or not the briefings are made. We don’t think the effort should be charged as a direct contract cost—even though the effort would be required by the DoD contracts that contain the new requirement. But we don’t think the buying commands will want to pay for such non-value-added labor that is neither engineering nor manufacturing. Instead, we suspect it will be good ol’ overhead that pays for the briefings. And so the overhead rates will go up and up, and DoD will (once again) pay more for goods and services, because it insists on micro-managing its contractors.
All the foregoing is in addition to the basic problem, which is that DoD will be slowing down contractors, who must now wait to schedule their individual briefings before starting work. So much for agility and innovation.
There will be a proposed rule and the public will have an opportunity to provide comment and input. We strongly suggest that your company avail yourself of that opportunity, even though the DAR Council has a horrible track-record of actually listening to public input.
UPDATE: Raytheon Settles One Dispute
The decision whether to settle or litigate is a hard one, no doubt about it. At one place, we heard a rule “$2 million/2 years” – meaning that if you weren’t disputing at least $2 million and/or if you weren’t willing to wait at least two years for a decision, then you should settle. The rule made some sense because litigation is expensive and the wheels of justice turn very slowly. Settlement is usually the preferred option.
Actually, as we’ve noted before, negotiation is the preferred solution and Contracting Officers are directed to negotiate an equitable solution wherever possible.
Even if nobody likes litigation, sometimes litigation is inevitable. But if litigation is a freeway, note that there are many off-ramps. Litigation and negotiation are not mutually exclusive. One way to push to a negotiated settlement is to request a Contracting Officer Final Decision (COFD) that can be appealed. Another way is to receive a COFD and file an appeal. Those actions signal the seriousness of the matter and can often spur negotiations that lead to a mutually acceptable settlement. Remember, then, that litigation does not preclude a negotiated settlement and may actually be the necessary catalyst to achieve one.
That may be the reason why the ASBCA website is littered with so many announcements that contractor appeals have been settled and the cases have been dismissed.
That lesson was brought to mind when we saw the recent ASBCA announcement that Raytheon Space and Airborne Systems (SAS) had reached a settlement with the government in its appeal of the government’s demand for $512,732 (ASBCA No. 87803) related to Raytheon SAS’ change to cost accounting practice disclosed in Revision 5 to its CASB Disclosure Statement. We wrote about Raytheon SAS’ litigation in a couple of articles (see link). As we noted, after Judge O’Connell was done with his rulings on the motions for summary judgment, it seemed to us (as non-lawyers) that Raytheon was liable for not more than $153,000, plus interest.
At that point, Raytheon and the government obviously negotiated a mutually acceptable settlement, as was announced on August 14, 2015. The amount of the settlement was not publicly disclosed. We assume, however, that it was in the neighborhood of $153,000. We do not know how much Raytheon SAS spent on attorneys to reach that negotiated settlement.
Originally, Raytheon SAS brought six appeals to the ASBCA related to demands for payment stemming from various changes to cost accounting practice. Three of those six were determined to be time-barred and dismissed (meaning Raytheon SAS owed nothing). One of them was a complete victory for Raytheon SAS (meaning that it owed nothing on the government’s demand for $1.2 million). One has now been settled after being significantly whittled down. That leaves just one case remaining to be heard on the merits.
All in all, not a bad outcome for Raytheon SAS.
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TINA is a Disclosure Requirement, Not a Use Requirement
The Truth-in-Negotiations Act (which we will call by the time-honored acronym “TINA” even though it is no longer officially called TINA in the FAR) is a tough compliance requirement. Essentially, it requires a bidder (or “offeror”) to disclose to the government negotiators all facts that would reasonably be expected to significantly affect price negotiations. All facts. And then the contractor has to certify that it has disclosed all facts and that its disclosure was current, accurate, and complete as of the date of final price agreement (or other specified date).
As we said, it’s a tough compliance requirement. If the government can prove that the contractor did not make a full disclosure, one that was accurate and complete and current, then it is entitled to a price reduction for the value of the “defectively priced” information.
Note, however, that the requirement is that the information must be disclosed. The information does not have to be used in the proposal. Indeed, the contractor can price its proposal in most any manner it believes complies with the pricing instructions, even though there is some piece of information it discloses that might be used by the government to negotiate a lower price. The contractor’s obligation is to disclose and, once it has met that obligation, it is no longer liable for any alleged violations of “defective pricing.”1
The ASBCA recently offered us a lesson in the application of TINA in Judge McIlmail’s decision in the matter of Symetrics Industries, LLC (ASBCA No. 59297).
As the facts were related, in December, 2007, Symetrics submitted a firm fixed-price proposal to the U.S. Army for “improved modem units.” DCAA audited the proposal. Before submitting its proposal, Symetrics had obtained DCMA approval for indirect rates of 179.2% overhead on labor and 25.6% G&A. The Judge didn’t identify those rates as being provisional billing rates or forward pricing rates, but it doesn’t really matter. We assume that Symetrics used those indirect rates in pricing its proposal for the modems.
A month after submission of its modem proposal, Symetrics submitted a new Forward Pricing Rate Proposal (FPRP). This was on January 7, 2008. A few weeks later (January 23, 2008), Symetrics submitted a revised modem proposal, which now used overhead rates of 182.45% for FY 2008 and 186.47% for FY 2009, as well as a G&A rate of 18.24% for both FYs 2008 and 2009. In other words, overhead was trending upward while G&A was trending downward.
DCAA audited the FPRP, which contained submitted rates of 170.38% (overhead) and G&A rates of 17.13%. Obviously, the FPRP rates were lower than the rates used to price the modem proposal.
The DCAA auditor was under the mistaken impression that Symetrics had used its FPRP rates to price its modem proposal. However, the DCAA audit report on the proposal clearly identified the rates used by Symetrics, and they did not match the FPRP rates.
Having received both DCAA audit reports, the Contracting Officers prepared a pre-negotiation memorandum. As the Judge stated, “Their prenegotiation memorandum expressly references both the 7 February 2008 FPRP and the DCAA audit report regarding overhead and G&A, but identifies the overhead and G&A rates that appear in the price proposal.” The Army and Symetics came to a price agreement even though Symetics “had not revised its price proposal to reflect the FPRP overhead and G&A rates, nor had it transmitted those rates directly” to the two Contracting Officers.
A hair under six years later, the Contracting Officer issued a COFD demanding $121,824 in “excess cost” (plus interest) based on Symetrics’ alleged failure to fully disclose all facts, including the fact that it had used indirect rates other than those in its FPRP to price its proposal. Symetrics appealed that final decision and its appeal was sustained.
Judge McIlmail’s decision stated—
As their prenegotiation memorandum expressly memorializes, PCO Jones and Contract Specialist Coleman negotiated the contract price knowing of the 7 February 2008 FPRP 2 and relying upon what they understood were the FPRP-proposed rates. DCAA Auditor Hepfner evaluated the price proposal with the same knowledge and understanding. Although the three evidently (at least ultimately) misunderstood what rates the FPRP proposed, the government points to no evidence that Symetrics misrepresented the contents of the FPRP, and all PCO Jones, Contract Specialist Coleman, and Auditor Hepfner had to do to confirm their understanding and discover their mistake was to double-check (or, perhaps, check in the first place) what rates the FPRP actually proposed against their stated understanding. In view of the foregoing, we find that the government was aware or should have been aware of the FPRP-proposed rates; this being so, the government has not proven that Symetrics did not disclose the FPRP rates within the meaning of the Truth in Negotiations Act.
(Internal citations omitted.)
Other government arguments did not persuade the ASBCA Board. Citing Alliant Techsystems (ASBCA Nos. 51280 and 47626), the Judge quoted –
Disclosure is not confined to a formal, written submission. Instead the contractor's disclosure obligation is fulfilled if the Government obtains the data in question in some other manner or had knowledge. It must be meaningful, regardless of the form it takes. Whether there has been meaningful disclosure depends upon application of a ‘rule of reason’ to the particular circumstances of [] each case.
Long story short: TINA is a disclosure requirement, not a use requirement. And disclosure can be broadly construed to include many avenues of communication, beyond a simple “data dump” to the government negotiators.
All that being said, it is important to make sure that you have disclosed all meaningful cost or pricing data, especially if (as here) you don’t intend to use it in pricing your cost proposals.
Operator of Sandia National Laboratories Learns Unallowable Lobbying is Unallowable
 Recently the Department of Justice announced that Sandia Corporation, a wholly owned subsidiary of Lockheed Martin, had agreed to pay $4.7 million in order to “resolve allegations that [it] violated the Byrd Amendment and the False Claims Act by using federal funds for activities related to lobbying Congress and federal agencies.” Lobbying, of course, is one of those activities made expressly unallowable by the FAR Cost Principle at 31.205-22. Not merely unallowable: expressly unallowable. A Federal contractor cannot claim the costs of lobbying activities as allowable costs. Period.
To make the concept even clearer for its contractors, the Department of Energy has a webpage devoted to the topic of lobbying. The webpage lists in great detail the various statutory and regulatory prohibitions on using Federal funds to engage in lobbying activities. There is really no room for misinterpretation as far as we can tell.
Regardless of the foregoing, it appears that the management team at Sandia Corporation allegedly “used federal funds to support activities to lobby Congress and other federal officials to receive a non-competitive extension” of its Management & Operating (M&O contract with the DOE.
Apparently, they should not have done that.
How did this happen? According to various sources—among them a recent story by Time magazine—the goal of the (alleged) lobbying efforts was to keep the DOE from awarding a follow-on M&O contract through competition. Historically the DOE has been criticized for awarding its M&O contracts on a sole or single-source basis and, to address that criticism, the agency formulated a strategy of competing the follow-on M&O contracts. Apparently, Lockheed Martin and its subsidiary thought they had a good chance of overturning that strategy if they could persuade a small number of legislators and high-ranking officials that competition would not be in the interests of the taxpayers.
(As a side note, as our recent article on the GAO’s concerns with competition showed, there may well have been some merit to that strategy.)
The allegations stemmed from a series of DOE Inspector General audit reports, the most recent of which (dated November, 2014) can be found here. The DOE IG report documented that Lockheed Martin and its subsidiary had allegedly used M&O funds to secure non-competitive contract extensions for a long time—dating back to 1998. Naturally, the decision-makers at Sandia Corporation had a rationale for such use. As the DOE IG report stated—
Clearly, SNL [ed. note: Sandia National Labs, not Saturday Night Live] officials were committed to the notion that the SNL/LMC relationship should continue into the future and that this should be accomplished without the benefit of competition. This was, as best we could determine, the underlying rationale for the actions identified in this report. SNL took the position that FAR 35.017, Federally Funded Research and Development Centers, allowed SNL to undertake these activities in order to be prepared to demonstrate to the Department/NNSA that SNL was fulfilling the Department's needs. SNL indicated that these were typical activities for any contractor intent on continuing a relationship with its sponsor, especially a Jong-term relationship, and that SNL was preparing to demonstrate that it deserved a full 5-year extension as contemplated by the FAR. Also, SNL indicated that, in accordance with prime contract clause I-8, FAR 52.203-12, Limitations on Payments to Influence Certain Federal Transactions, Subsection C, and prior to a formal solicitation for competition, SNL prepared information and met with NNSA personnel because SNL felt it necessary for the Department and NNSA to make an informed decision on a contract extension. SNL argued that its actions to obtain a contract extension were based on ‘the merits of the matter,’ and that SNL costs associated with such activities were allowable.
What did the DOE IG think of that rationale? The report stated--
In contrast, we find that the position and actions taken by SNL to develop and execute the contract extension plan to be highly problematic. Given the specific prohibitions against such activity, we could not comprehend the logic of using Federal funds for the development of a plan to influence members of Congress and Federal officials to, in essence, prevent competition. As noted above, SNL was cognizant of problems with using Federal funds for similar purposes, but chose to interpret Federal regulations and use Federal funds in a manner that was intended to benefit its parent corporation.
Based on the foregoing, it appears to us that Sandia’s compliance folks were told one thing (i.e., that the “capture team” was simply preparing pre-RFP information for Congress and other high-ranking officials with no intent to influence anybody), while instead the team was (allegedly) working hard to influence individuals in order to avoid the issuance of an RFP in the first place. The compliance folks seem to have been given a certain set of facts about the activities, and then they found enough ambiguity in the regulations and contract clauses to make those activities allowable.
Or so they thought at the time. Years later, $4.7 million proves they were overly optimistic—or else simply misled. We suspect it’s the latter and not the former.
The lesson to be learned here is that facts matter. The determination of cost allowability is highly fact-dependent.
If you tell us what you are doing and (more importantly) why you are doing it, we can give you an allowability determination with a high degree of confidence. But it you mislead us, or withhold certain crucial facts, then our determination may well be wrong. And that error may end up costing the company millions of profit dollars.
As a corollary to that lesson, remember that compliance practitioners need to dig for the facts. We cannot simply accept what we are told without challenge. We need to probe and compare and question, so as to make sure we are confident we understand the what and the why, so that the correct cost allowability determination can be made. If we just accept what we are told without probing and verifying, then we become “yes men” instead of professionals.
Being a compliance practitioner is hard. Sometimes it involves deep research in order to understand the rules governing certain transactions. Often, it involves saying “no,” which is always a risky proposition from a career point of view. But that is what the job entails. If you are not up for it, you need to find another line of work.
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