MLA’s Diaspora Continues
Recently we noted with some sadness that the venerable Government Contract practice at the firm of McKenna, Long and Aldridge had been more than decimated by the loss of some 20 Washington, D.C., attorneys, who moved en masse to Covington & Burling. It’s reasonable to ask why we took the time to write about the exodus. After all, who really cares about which attorneys are at which firms—besides other Big Law attorneys, that is.
The thing is, those Big Law attorneys represent a tremendous amount of knowledge, experience, and smarts. The Big Law Government Contract practices contain a wealth of tips and advice for those who know how to mine for it. We subscribe to a number of newsletters, client advisories and press services from various law firms, the better to get the inside scoop on what various legal decisions, regulatory revisions, and upcoming legislation are likely to mean and how they might impact government compliance postures. We use that information to inform our consulting practice and our blog articles (always giving appropriate attribution and credit). Thus, we care about the health of the Big Law Government Contract practices, and you should care as well.
The practitioners at MLA have had a huge impact on the current state of government contract compliance. For years, they have partnered with the Public Contracting Institute to produce informative monthly webinars on topics of interest to the government contract compliance community. MLA attorneys have been a mainstay of the seminal Federal Publications Seminars courses for many years. In fact, three of the eleven attorneys scheduled to speak at Fed Pubs’ 2015 West Coast Year in Review Conference are listed as being from MLA. In addition, MLA took the lead in addressing issues associated with the DFARS Business Systems Administration and oversight regime, going so far as to publish a guidebook on the topic.
So when we say that MLA’s Government Contract practice is dispersing to other firms, it’s kind of a big deal.
In our original article on the departure of MLA’s Washington, D.C., attorneys, we wrote—
That's not to say the remaining MLA government contract attorneys (which include, e.g., the illustrious Tom Lemmer in Denver and James Gallagher in Los Angeles) won't carry on the proud tradition; but we suspect it won't be the same.
Well, we may have spoken a bit prematurely.
On May 11, 2015, the law firm of Pillsbury Winthrop Shaw Pittman announced that 13 MLA attorneys were joining its firm. Among those 13 former MLA attorneys were four government contract attorneys—including James Gallagher, Michael Rizzo, Kevin Slattum, and Todd Canni. The Pillsburylaw press release stated—
The four government contracts partners all have deep experience in government contracts, including bid protests, disputes, litigation and compliance. They constituted a substantial part of McKenna’s large national Government Contracts practice, which was Chambers USA Tier 1 ranked.
‘The addition of Jay, Mike, Kevin and Todd represents a strong opportunity for us to significantly grow both our firm-wide government contracts group and our current offerings in Los Angeles and California,’ said Nancy A. Fischer, leader of Pillsbury’s public practices and public policy sections. ‘It will make Pillsbury one of the few law firms in the country with a Government Contracts practice on both coasts, and will expand our ability to serve West Coast clients.’
Now, we don’t want to say that MLA is out of the government contract picture. Far from it: there are still some 50 attorneys listed on the MLA/Dentons website as being part of its government contract practice. Indeed, the MLA Denver government contract practice appears to be completely intact as this article is being written. So don’t count MLA out of the fight.
On the other hand, two law firms now have significant government contract weight and heft, and can go toe-to-toe with any other firm in the public contract law arena. It will be interesting to see how they develop their newly enhanced practices going forward.
Cost and Price Analysis and the Contracting Officer
Normally our perspective is that of the contractor, the commercial entity that enters into a contract with the Federal government and then has to figure out how to comply with a myriad of rules and regulations while at the same time delivering a product or service on time, on budget, and with the expected quality. It’s a tough job and not every company can navigate those rough waters, and so those companies often turn to consultants—such as Apogee Consulting, Inc.!—to assist them. Since that’s what we do, we naturally bias toward the contractor’s viewpoint. But not always.
Today we want to explore things from the perspective of a Navy Contracting Officer, a seasoned veteran nearing the end of a long civil service career, who was tasked with negotiating a $1 Billion contract for spare parts. It could have—and it should have—been the crowning moment of his career; yet events did not turn out that way. Instead of retiring on a high note, covered in glory, the Navy CO retreated under fire and faded away into obscurity.
The Naval Supply System Command Weapon Systems Support (WSS) was formerly known as the Naval Inventory Control Point. What does WSS do?
WSS provides Joint, Allied, Navy, and Marine Corps Forces program and supply support for Naval Weapons Systems. WSS maintains centralized control over more than 400,000 different line items of repair parts, components, and assemblies that keep ships, aircraft, and weapons operating, while also providing logistics and supply assistance. WSS is responsible for negotiating and procuring these parts from DoD contractors. It operates two primary sites in Mechanicsburg and Philadelphia, Pennsylvania.
The Contracting Officer in question was located at the WSS site in Philadelphia, PA. He was tasked with negotiating a $1 Billion aircraft spare part contract with an unnamed prime contractor. As part of the process, the CO requested “field pricing assistance” from the Defense Contract Audit Agency (DCAA) and, accordingly, DCAA issued Audit Report No. 02151-2010B27000001 on July 6, 2010. In that report, DCAA found that “the contractor’s proposal was not an adequate basis for establishing a fair and reasonable price.” In particular, DCAA found that $240 million of the proposed costs were “unsupported” because the prime contractor failed to obtain the required cost or pricing data from its subcontractors. In addition, DCAA questioned $17 million of proposed material costs, asserting that they were overstated because the contractor used “inflated escalation factors” and failed to decrement costs by the amount of vendor discounts. (We assume those discounts were related to payment terms but it’s not especially clear.)
Despite DCAA’s findings and recommendations, the WSS CO negotiated a firm, fixed-price contract for the spare parts. As part of the negotiations, the period of performance was reduced from 5 years to 3 years. The 40 percent reduction in duration resulted in a 42.4 percent reduction in price, such that the negotiated contract value was $576 million not $1 Billion as initially proposed. Apparently, the CO did not negotiate much if any other reductions to the proposed price. In particular, the CO never obtained the missing subcontractor cost or pricing data, and did not obtain price reductions for DCAA’s “questioned” costs. One might say that the CO simply ignored DCAA’s audit findings and negotiated the best deal he could.
What was the CO thinking? Were there schedule pressures on him, such that he couldn’t afford to wait for subcontractor cost or pricing data to be obtained and analyzed? Did he simply disagree with DCAA’s findings?
We do know that the CO wrote that he relied on the prime contractor’s “adequate” estimating system to justify his acceptance of the proposed subcontractor costs. “The contracting officer reasoned that the prime contractor’s [adequate] estimating system eliminated the need to comply with the cost or pricing data requirements.” That doesn’t sound right, even to us. Even though we keep hearing and reading that contractor business systems are the “first line of defense against fraud, waste, and abuse,” we’re pretty sure that having approved and adequate business systems don’t relieve anybody from having to comply with FAR requirements. It would be nice if they did; but they don’t. We expect a seasoned CO would have known that.
As is the case with so many actions in these centrally controlled days, the CO’s file was “peer reviewed” prior to contract award. Apparently, the peer review raised concerns as to whether the CO had adequately responded to the DCAA audit findings; however, those concerns didn’t stop the CO from finalizing the contract award, and those concerns didn’t stop the CO’s supervisor from approving the contract award. So much for peer reviews.
The CO’s approach must have ticked somebody off, because a complaint was filed on the DoD Inspector General Hotline—which is how we learned about this story.
As one might well expect, the DoD IG “substantiated the compliant.” The IG excoriated the CO for failing to obtain the required subcontractor cost or pricing data. The IG also criticized the CO for failing to follow DoD PGI 215.406(B)(1), which requires that disagreements over “significant” amounts of questions costs be resolved, or escalated for resolution. As we know, that didn’t happen in this case. The IG wrote—
The contracting officer had a responsibility to comply with regulatory requirements and appropriately consider the DCAA audit findings. By not fulfilling his responsibility, WSS was unable to adequately demonstrate that the resulting contract price of $576 million was fair and reasonable. The contracting officer could have potentially negotiated a lower contract value and achieved significant savings for the Government if he had appropriately considered DCAA’s findings.
The DoD IG made several recommendations aimed at preventing a recurrence of the situation. The Deputy Assistant Secretary of the Navy (Acquisition and Procurement) concurred with each of them. Among the recommendations was to “consider appropriate administrative action” to apply to the CO. The response to that recommendation was a concurrence with the notation that it would be impossible to do so, because the CO had retired before the IG’s report was issued.
And so we are reminded, once again, that this is a tough environment and nobody wins any awards for failing to comply with the complex web of statutes, rules and regulations. As tough as the contractors have it, sometimes the government employees have it just as tough, if not tougher.
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The First Line of Defense
For defense contractors (and non-M&O Dept. of Energy contractors), business systems are “the first line of defense against fraud, waste, and abuse.” How many times have we heard that phrase? It’s been in the Federal Register several times, and in Agency guidance several additional times. The line has been in a Public Law. It’s been all over the place. The phrase has become conventional wisdom by this point.
We like to question conventional wisdom.
On August 11, 2009, the Commission on Wartime Contracting (CWC) “conducted a hearing to obtain testimony from government officials and contractors on the adequacy of contractor business systems.” At that hearing—
The Commission learned that unreliable data from business systems produced billions of dollars in contingency-contract costs that government auditors often could not verify. The government’s ability to detect contract cost errors and material misstatements is seriously impeded by contractors’ inadequate internal controls over their business systems. Further, the two primary government agencies involved, the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA), are not effectively working together to protect government interests.
The CWC subsequently published a report in September of that year, entitled “Defense Agencies Must Improve their Oversight of Contractor Business Systems to Reduce Waste, Fraud, and Abuse”. The first line of that report was “Contractor business systems and internal controls are the first line of defense against waste, fraud, and abuse.”
And that’s how it started.
Flash-forward 5+ years and there has been a profound sea-change in the focus on contractor business systems since the CWC sounded its warnings. The landscape is entirely different. We have six business systems (not 10 internal control systems). We have deficiencies and significant deficiencies. Significant deficiencies mean disapproval (or inadequacy) and that leads, inexorably, to mandatory payment withholds. Reviewing contractor business systems has become a cottage industry, with consultants and attorneys eager to assist contractors with creating adequate business systems, or remediating those systems that failed DCAA or DCMA audit.
And now we have reenergized DCMA functional specialists and refocused DCAA auditors, with new and improved audit programs to help them evaluate business systems. We have peer reviews of ACO business system adequacy determinations, and at least two levels of Review Boards to help adjudicate disagreements between the ACO and those who performed the reviews. We have process upon process, and guidance upon guidance—all to help focus oversight on the first line of defense against fraud, waste, and abuse.
The thing of it is: it’s all nonsense. It’s pretty much a big waste of taxpayer funds.
Allow us to explain.
 Let’s talk about the Maginot Line.
The Maginot Line was France’s first line of defense against German invasion. Constructed between World War I and World War II, the Maginot Line was designed to stop the Germans cold. From Wikipedia—
The Maginot Line was impervious to most forms of attack (including aerial bombings and tank fire), and had state-of-the-art living conditions for garrisoned troops, air conditioning, comfortable eating areas and underground railways.
It seemed like a really good idea at the time. Unfortunately, the Germans didn’t cooperate. They didn’t use the same strategy they had employed in World War I. As Wikipedia noted—
The French established the fortification to provide time for their army to mobilize in the event of attack, allowing French forces to move into Belgium for a decisive confrontation with Germany. The success of static, defensive combat in World War I was a key influence on French thinking. French military experts extolled the Maginot Line as a work of genius, believing it would prevent any further invasions from the east.
While the fortification system did prevent a direct attack, it was strategically ineffective, as the Germans invaded through Belgium, going around the Maginot Line. The German army came through the Ardennes forest and the Low Countries, completely sweeping by the line, causing the French army to surrender and conquering France in about six weeks
Moreover, the Wikipedia article asserted that the Maginot Line, “proved costly to maintain and subsequently led to parts of the French Armed Forces being underfunded and not provided with the troops, equipment and communications needed for the war.” Consequently, “reference to the Maginot Line is used to recall a strategy or object that people hope will prove effective but instead fails miserably, giving way to the ‘Maginot Line mentality’.”
Sound familiar?
The focus over the past 5 years on contractor business systems is the Maginot Line of today’s DoD oversight function, especially the oversight provided by the Defense Contract Management Agency. Like the French focus on their fixed fortifications, it is the wrong strategy. It is the wrong focus. And it takes funding and resources away from other, more critical, areas.
The focus on contractor business systems is not a focus on preventing fraud, waste, and abuse. Instead, it is a focus primarily on policies and procedures. Contractors can best prove the adequacy of their business systems by having really thick policies and procedures that address every one of the applicable adequacy criteria. The best way to pass a business system review is to have a lot of really good policies and procedures; the actual practices are of lesser importance. That’s not to say that certain metrics won’t be part of the review; they will be. It’s just that the corrective action plan to remediate any findings will almost certainly consist of writing better and more robust policies and procedures, and ensuring employees are trained in their contents.
The adequacy criteria themselves are largely ambiguous and subjective, and so disagreements arise easily during audit. As we’ve noted before, DCAA has taken the definition of “significant deficiency” found in the regulations and created something not envisioned by the rule-makers so that the auditors can comply with GAGAS. The irony there is that the AICPA says the adequacy criteria aren’t auditable, and so it’s tough to see how any auditor could ever comply with GAGAS no matter how terms are defined.
The focus on contractor business system adequacy is an imaginary line of defense because policies and procedures are not—nor have they ever been—the first line of defense against fraud, waste, and abuse.
The first line of defense is people. People who make good decisions when faced with conflicting priorities. People who have the training to make those decisions, and the resources to call upon when things get tough. That’s your first line of defense.
People are always the first line of defense and all the policies and procedures in the world won’t stop bad decisions from being made by poorly trained and poorly supported people.
Any approach that focuses on ambiguous, subjective, adequacy criteria, that focuses on written policies and procedures, is a Maginot Line approach.
And while DCMA and DCAA are focused on six contractor business systems, too many contractor employees continue to engage in wrongdoing, including such activities as bribery, kick-backs, and other corrupt behavior. Indeed, the adequacy of a contractor’s business systems is absolutely no guarantee that its employees are engaging in ethical decision-making. The best policies and procedures in the world don’t ensure ethical decision-making. Just ask the executives of Enron.
It’s past time for DoD policy-makers to admit that oversight of contractor business systems, in its current form, is not the first line of defense against fraud, waste, and abuse. They are not the first line of defense, nor have they ever been. In fact, the business systems adequacy criteria have very little to do with preventing waste, fraud, and/or abuse.
It’s past time for DoD to admit that the focus on contractor business systems is a mistake, one that takes resources and funding away from more important things. It’s time to get DCAA out of business systems audits altogether and, to the extent DCMA wants to review certain contractor practices and controls, it should do so in a streamlined fashion, without the multiple layers of bureaucracy and without the nuclear option of payment withholds.
End of an Era
We weren’t there, but we are reliably informed that the modern era of Government Contract-related law started in 1958, when Gilbert A. Cuneo, Vice Chair of the Armed Services Board of Contract Appeals (ASBCA) joined the law firm of Cummings & Sellers, establishing “the modern day practice of government contracts law.”
Mr. Cuneo must have done something right, because the firm eventually became known as Sellers, Conner & Cuneo. In 1980, that firm merged with McKenna & Fitting to become McKenna, Conner & Cuneo. Ten years later the firm was known as McKenna & Cuneo.
In 2002, McKenna & Cuneo merged with Long, Aldridge & Norman to form McKenna, Long & Aldridge LLP. By 2008 the MLA Government Contracts practice billed itself as “the largest” such practice in the United States. Besides the traditional Washington, D.C., location, MLA government contract attorneys could be found in Denver and Los Angeles, New York and San Diego. By 2015 there were 70 attorneys associated with the government contract practice.
On April 8, 2015, MLA merged with Dentons to become the world’s largest law firm.
But not everybody was happy with the merger. In particular, it seems that a number of MLA's Washington, D.C., government contract attorneys thought the merger was unhappy news.
According to this news story –
It now appears that McKenna will face a string of high-profile departures: In addition to Tosta, Big Law Business has learned from multiple sources that a group of up to 20 government contract, white collar defense and other lawyers primarily from its Washington, D.C. office plan to join Covington & Burling, and the former managing partner of the Los Angeles office, whose practice is focused on entertainment, plans to join Pillsbury Winthrop Shaw Pittman.
…
The lawyers joining Covington & Burling include Fred Levy, McKenna Long’s recent government contracts chairman, and Michael Scheininger, head of the firm’s white collar practice. A handful of the lawyers who are joining had voice messages that acknowledged their move to Covington, including Scheininger, and Ray Biagini, the head of McKenna’s product liability defense practice.
A press release on the Covington & Burlington website has this to say on the matter –
Covington is significantly expanding its government contracts practice with 20 lawyers from one of the nation’s top government contracts groups, including its former chair and leaders in contractor tort liability, bid protests, procurement fraud, trade secrets and employment.
The group of five partners and 15 other lawyers from McKenna, Long & Aldridge expands and deepens Covington’s capabilities across a range of government contracts matters. Frederic Levy, until recently the chair of McKenna’s government contracts practice, will serve as co-chair of Covington’s government contracts group with Alan Pemberton and Jennifer Plitsch.
These additions double the size of Covington’s government contracts group and place it among the nation’s largest. The work of the new lawyers runs the gamut from contract formation to bid protests to claims and internal investigations to tort litigation to False Claims Act litigation. Chambers has consistently ranked McKenna’s government contracts practice in its highest band, and the group that joined Covington includes most of that firm’s Chambers-rated lawyers in government contracts.
In addition to the other attorneys named, the press release noted that Herb Fenster, who had been with MLA (and prodecessor firms) for 55 years, was moving to Covington. Moreover, Sandy Hoe will be moving as well. In many ways, these names represent the heart and soul of the practice that Gil Cuneo created in 1958. That's not to say the remaining MLA government contract attorneys (which include, e.g., the illustrious Tom Lemmer in Denver and James Gallagher in Los Angeles) won't carry on the proud tradition; but we suspect it won't be the same.
We wish those attorneys moving to Covington well, of course. Still there is some sadness as well. It may well be the end of an era, an era where expertise in public contract law could jumpstart a large law firm and keep it going through difficult times.
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