Checklists and Regulations, Oh My!
So we noticed that the National Aeronautics and Space Administration (NASA) recently announced it has adopted the now-ubiquitous "Proposal Adequacy Checklist" under the guise of "reducing transaction costs in NASA procurements."
How lovely for the space agency that once led the vanguard with respect to technical innovation and derring-do, an agency that is now pretty much known as much for bureaucratic bungling as its technical successes (which largely derive from the dreams of crazy young scientists who succeed in spite of the constraints placed upon them by the bureaucrats). NASA's strategic mission has evolved from its October, 1958, founding focus on exoatmospheric space flight to … what? (Nobody knows for sure.) Since the agency has insufficient funding and few champions in Congress and no national mandate for its mission, it has cannily chosen to emulate the most efficient of all Executive Branch Departments: the Department of Defense.
They say imitation is the sincerest form of flattery.
NASA has adopted the Proposal Adequacy Checklist in spite of public input that opined-
… the proposed rule passed the administrative burden and shifted the associated costs directly onto the contractor which was inappropriate. Respondent suggested, as an alternative, that solicitations require standardized table of contents with a proposal.
The NASA rule-makers reviewed that comment, mulled it over, discussed it amongst themselves in a frank and thoughtful exchange of views, and responded as follows-
This rule does not impose additional requirements over what is already required under the conditions when certified cost or pricing data is required. This provision is a single uniform tool that is applicable across NASA to promote consistency in compliance with FAR Table 15-2.
Well, there you go. The rule does not impose any additional requirements. So shut up and follow it.
Which begs the question, of course, as to why the heck a rule-any rule-which "does not impose additional requirements," would even be necessary. One might reasonably think that a rule which does not impose additional requirements would not be necessary in the first place, and would be seen as a complete waste of the rule-makers' time. Promulgating a rule that does not add any additional requirements would seem to be the equivalent of gilding a lily, or shipping coals to Newcastle, or extolling the virtues of ice to Eskimos.
But of course the truth is the rule does impose additional requirements: it just imposes them on contractors and not on Federal officials. It requires contractors submitting certain proposals to NASA to fill out an onerous checklist that adds no value to anybody. At best, the Proposal Adequacy Checklist creates the illusion of the imposition of quality, because anybody can fill out that checklist and say anything, while in reality their proposals may still omit lots of required cost or pricing information. The simple truth is that a completed Proposal Adequacy Checklist is no guarantee of the underlying quality of the proposal accompanying it.
It's the Potemkin Village of proposal quality control.
Yet NASA thinks requiring such an illusion is going to somehow reduce agency costs associated with evaluating proposals. Does anybody reading this blog expect that to be the outcome?
And despite protestations to the contrary, NASA is adopting a Checklist that's also demonstrably redundant and unnecessarily burdensome. The DAR Council admitted as much when it recently revised the Proposal Adequacy Checklist "to remove a redundant item." Here's what the rule-makers said about their regulatory action-
Item 19 [of the Checklist] required price analysis for all commercial items offered that are not available to the general public. Through further research and discussion, DOD has determined that item 19 … is duplicative in nature. DoD has concluded that items proposed with a commercial basis under subcontracts in the proposal require price analysis by the offeror. Furthermore, DoD has also concluded that question 14 under the Material and Service section and question 17 under the Subcontracts section on the Proposal Adequacy Checklist currently address the requirement for price analysis of the proposed commercial item that is produced or performed by others.
Thus, after "research and discussion" the rule-makers finally concluded what the public told them nearly a year ago: the rule was hastily written and poorly thought-out. It imposed additional requirements of little or no value, and was going to lead to increased costs on the contractor side without any cost reductions on the Government side.
Accordingly, it's more than a little ironic that those Pentagon paper-pushers who ignored public input and essentially adopted DCAA's policy position(s) lock, stock and barrel have now requested public input into their review of "requirements which impact the efficiency of the acquisition process." This initiative is so important to DOD that it just published a Federal Register Notice to extend the public input period from 30 days to 70 days. While the DPAP folks point to statute as the basis for rules that impede efficiency, we ourselves would point to DPAP, DCAA and the DAR Council as significant contributors to the current moribund state of defense acquisition.
Hey, we're just sayin'.
And we're just sayin' that the asinine Proposal Adequacy Checklist is a great example of the imposition of illusory controls that add no value, and simply act to give DCAA a reason not to provide Contracting Officers with "field pricing assistance". And we're just sayin' that the FAR Case 2008-020, implemented in FAC 2005-52 is another great example of the imposition of burdensome rules that limited Contracting Officers' ability to close-out contracts rather than speed contract close-outs (which was the guise under which the rule was originally perpetrated).
What the two rules have in common is they act to shift DCAA's audit burden to contractors. They both give DCAA a checklist which guides auditors into concluding that the proposals are adequate for audit, or not. And if the auditors conclude that the proposal they are looking at is not adequate (as defined by the checklist rather than the exercise of professional judgment), then those auditors have a wonderful regulatory-based excuse for not auditing it.
This is the paragon of procurement efficiency that NASA has chosen to emulate.
Great job, NASA! We're sure that your auditors (which tend to be DCAA auditors, naturally) will be thrilled that they have another checklist to use.
The next step, of course, is for NASA to announce a thorough review of all regulatory requirements that drive up costs and impede efficiency. Unless they decide to wait for DOD to complete its review, which they can they adopt wholesale without any critical analysis whatsoever.
Did Northrop Grumman Defraud DHS?
It’s America, folks, and anybody can sue anybody over any dang thing. Allegations are as easy to make as typing up a complaint, handing it to the Clerk, and paying the filing fee. Allegations are easy; evidence is hard.
Evidence is what turns an allegation into a cause of action that leads to civil litigation and a large dollar value settlement. The proof, as they say, is in the pudding. Anybody can make an allegation, but it’s evidence that wins lawsuits. (Well, evidence and good lawyers. But we digress….)
Qui tam relators (or as they are sometimes called, “private attorneys general”) very often get a bum rap. Those “bounty hunters” that file lawsuits alleging violations of the False Claims Act typically get branded as disgruntled malcontents suffering from hallucinations and/or dementia. Too often they are vilified and castigated; sometimes they receive threats for their perceived disloyalty. Sometimes they are retaliated against by their employers for their whistle-blowing. (Note: it is a really bad idea for an employer to retaliate against a whistle-blower.)
This is not the first time we’ve waxed philosophic about qui tam relators and how their allegations are received and perceived by those who’ve found themselves cast in the role of “defendant” in False Claims Act (FCA) litigation. We wrote—
If the only people who filed qui tam suits under the FCA were disgruntled employees trying to get back at their (former) employers, then there would be no findings of liability and only the smallest of settlements. But that’s not the case. While many qui tam “relators” are, in fact, disgruntled, there is often some basis to their suits. We see this when the DOJ intervenes and the ensuing litigation leads to an enormous settlement. So the fact of the matter is that the emotional state of the relator is irrelevant to whether or not the Courts will find a sufficient factual basis to support a finding that the contractor violated its duty to submit accurate invoices to the U.S. Government.
All that being said, your company risks a qui tam suit every day. Every disgruntled employee is a potential relator. If you make your employees disgruntled, through your management actions (or inactions), then you increase the risk that one or more of them are going to file suit.
About three weeks ago (as this is written) Northrop Grumman learned that one of its ex-employees—a Program Manager—had filed a FCA suit as a qui tam relator. The suit, originally filed in 2009, was unsealed at the end of January because the DOJ declined to intervene.
We saw the article reporting the story and didn’t think too much about it. After all, government contractors are on the receiving end of multiple lawsuits all the time—just as most publicly traded corporations are. It seems that somebody is always alleging something, from wrongful termination of employment to sexual harassment to outright fraud. If we reported every allegation made against a government contractor that came to our attention, we’d do very little except report them. Which would be boring, both to you and to us. So we read the article and passed on the opportunity to report it.
Except it came up in another search today and some of the phrases seemed to leap from the page this time around, capturing our interest and (hopefully) distinguishing the allegations from the normal, run-of-the-mill, contractor fraud finger-pointing.
It’s not often we see the phrase “stole by playing accounting games” in a news article. We’d like to understand the alleged “accounting games” so that we might file them away for future reference. So we resurrected the article and gave it another look-see.
The relator alleged many things, including that Northrop Grumman promised to do “work that it never intended to do” in its proposal to DHS. In addition (according to the article)—
The company received a 25% profit on the follow-on contract, double the negotiated rate, according to the suit. The action also alleges company officials balked at coming up with improvements for commercial variants of antimissile systems because they recognized that ‘increased reliability would reduce Northrop's lucrative business of providing spares and replacements to the Department of Defense.’
We noticed that the relator was Northrop Grumman’s former Program Manager. Yes, it was the (former) PM who was dropping a dime with respect to his former program. According to the article, the (former) PM alleged that “in 2007 and 2008 the company intentionally inflated costs, presented false bills, lied about progress and withheld test data from the Department of Homeland Security.” Let’s be clear here: the whistle-blower was blowing the whistle on himself.
We did not see any allegations related to “accounting games” and so we left disappointed. We noted that the Federal Rules of Civil Procedure, Rule 9(b), requires that allegations of fraud must be pled with particularity—i.e., that the relator “must identify at least one actual claim that was false, rather than simply describing a scheme to defraud.” (See this analysis.) On the other hand, it appears that the Supreme Court of the United States may have to decide the issue, according to this blog article.
We don’t presume to know whether or not this case meets the specificity test or not. But we do know that this case presents many of the elements of typical FCA litigation: a former employee, a set of allegations, expensive attorneys and their legal bills, and unfavorable newspaper headlines. Thus, regardless of whether Northrop Grumman ultimately prevails, it has already lost.
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Face Palm Level Contractor Fraud
Sometimes we come across stories of contractor fraud that make us realize why so many government auditors are so skeptical about government contractor costs, and why so many "gadfly" NFPs are so skeptical about the integrity of government contractors, and why so many politicians are so willing to assist in efforts to combat government contract fraud through passing legislation.
This is one of those times.
For Pete's sake.
How in the world does a contractor get into such a predicament? How in the world do so many employees fail to blow the whistle on such an egregious fraud? The amount of collusion here is truly staggering. How convenient that the fall guy is dead and can't tell his side of the story….
Care to learn more?
Today's story comes courtesy of the DOD Inspector General, who posted this press release from the U.S. Attorney of the Southern District of California. It concerns the travails of Vector Planning & Services, Inc. ("Vector"), who had reached a deal with the US Attorney in which it admitted to "criminally defrauding the Defense Department … resulting in losses … of over $3.6 million." Vector settled its issues for $6.5 million.
The details of the fraud are … staggering. Truly, words fail us. So we'll quote from the press release.
… Under a cost-reimbursement contract, a contractor is entitled to reimbursement for both its direct allowable costs … and a prorated portion of its indirect allowable costs … Because indirect costs must be pro-rated across multiple contracts, they cannot be precisely determined until the end of the fiscal year. Accordingly, under a cost-reimbursement contract, a contractor initially submits claims for indirect costs based on 'provisional' or estimated rates, and later submits its actual indirect costs to the government for review, reconciliation, and approval. This later submission, known as an 'Incurred Cost Submission' or 'Incurred Cost Proposal,' reflects what the contractor certifies were its actual allowable costs for the prior fiscal year.
In this case, Vector admits that after claiming and being paid for direct costs in connection with other, firm-fixed-price and time-and-materials contracts, Vector systematically reclassified these same costs in its accounting system to make it appear as if the costs were indirect costs that were incurred in connection with its cost-reimbursement contracts, thereby inflating its indirect cost rates. These inflated rates were then used by Vector to justify the rates claimed in its Incurred Cost Proposals submitted to the Navy. The effect of these fraudulent submissions was, in essence, to pay Vector twice for the same expenses, amounting to 'double dipping' or 'double billing' at government expense. Vector admits to submitting these false Incurred Cost Proposals for costs incurred in 2005 through 2009, with a total loss to the Defense Department of $3,672,756. As described in Vector's agreement, Vector made these false submissions in 2010, 2011, and 2012.
When faced with a Defense Department audit in late 2011, Vector falsified its electronic accounting entries, and prepared and backdated fake invoices in order to support those falsified accounting entries.
Not only did Vector reclassify direct costs to indirect costs in order to fraudulently increase actual indirect costs to better align with provisional indirect costs, company employees also decided it was a great idea to prepare fake invoices in order to support the validity of its reclassified costs.
Face palm.
We would like to go on record as saying--if in fact it needs to be stated--that we would never, ever, advise our clientele to emulate Vector. Indeed, we have discussed (in some detail) issues associated with adjusting provisional billing rates during contract performance. Any government contractor that contemplates such a weapons-grade stupid strategy to calculating indirect cost rates and/or supporting DCAA audits had better not call this consulting firm.
We couldn't take the gig anyway. We'd be too busy face-palming.
DOE Contractors Must Comply with Business System Administration Regime
Last August we reported that the Department of Energy had decided to implement the DFARS Business System administration regime for its contractors. We were interested to note that DOE Management and Operations (M&O) contractors were exempted from that decision. We also noted that DOE had decided to implement only five of the six DFARS business systems, leaving MMAS on the cutting room floor (so to speak).
On February 12, 2013, the DOE issued further implementation guidance via Acquisition Letters (ALs).
Link to DOE Policy Flash 2014-17 which summarized the changes from the prior Business System ALs.
Link to DOE AL which describes how DOE will implement the Business Systems administration regime.
As is usually the case with DOE, policy makers provided background and context, as well as direction, to their acquisition teams. (We wish DOD would take a similar approach.) When perusing the AL we noted several points we would like to bring to readers’ attention.
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DOE contractors that don’t have approved accounting and purchasing systems are going to have a tough time being determined to be “responsible” contractors, as that term is defined at FAR 9.1. The AL states, “The contracting officer shall ensure that the offeror/contractor has an approved accounting system and purchasing system for use under the contract.” Contractors that have unassessed accounting systems will be evaluated via the SF 1408 Pre-award Survey. Contractors that have disapproved or inadequate systems are going to be in trouble.
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DOE contracting officers are directed to obtain business system information from contractors “not later than 60 days after contract award.” Contractors must submit “written documentation that each business system meets the system criteria required in each clause”.
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DOE provided guidance to its contracting officers addressing negotiation objectives when a contractor has a disapproved accounting system. Options include: (1) give the contractor time to correct identified deficiencies, (2) use another contract type, (3) reduce profit/fee, or (4) including a contractor “reopener” clause.
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Similar guidance was provided to address negotiation objectives when a contractor’s purchasing system has been disapproved.
Importantly, DOE has different criteria than DOD regarding which contracts are subject to the Business Systems administration regime. DOD implements the rules only on CAS-covered contracts. All other contracts are exempt from payment withholds arising from disapproved or inadequate business systems. DOD implements the rules on CAS-covered contracts plus “fixed-priced contracts awarded to large businesses on the basis of adequate price competition” regardless of whether cost or pricing data was submitted.
In summary, DOE has adopted a similar, yet subtly different, approach to contractor business system administration.
Meanwhile, how’s DOD doing with its approach to contactor business system administration?
At the end of January, Bloomberg reported that payment withholds were in place at several of the largest defense contractors, including Northrop Grumman ($1.4 million), Boeing ($5.2 million), and BAE Systems ($19 million). In addition, Bloomberg reported that DCMA was planning to start withholding payments from Honeywell and General Atomics.
Readers will perhaps recall our story that DCMA had finally approved Lockheed Martin’s EVMS business system at its Fort Worth facility, freeing up roughly $222 million in previously withheld payments. The Bloomberg article reported that $46.4 million in payment withholds (related to an unidentified deficient business system) had also been freed up at Lockheed’s “space unit”. Interestingly, DCMA is not letting Lockheed Martin recoup the payment withholds in one lump sum (as we would have guessed), but instead, “Lockheed has received some of the payments, and the rest will be released in future billings.” Why? We have no idea.
So if you are a DOE contractor looking to assess risk associated with the new business system administration regime, you have only to look at those large DOD contractors. Based on their experiences, you may just want to take this whole thing seriously.
If you are a DOE contractor new to the business system administration regime, you will want to start by mapping your current practices to the official adequacy criteria. You will want to remediate any gaps. You will want to document the compliant state through policies, procedures and desk instructions. You will want to prepare boilerplate language for your future DOE proposals. You will want to develop walk-through presentations to support future business system audits/reviews. If you don’t currently have assessed or approved accounting or purchasing systems, you will want to focus on those two systems first.
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We would very much like to think the foregoing will inspire contractors to get serious about their business systems. Unfortunately, experience has taught us to be more cynical. Too many contractors are going to defer investing in their business systems until the very last minute—i.e., just before their covered proposal is due to be submitted. Trust us, at that point it’s really too late. The DOE guidance makes it clear that deficient accounting or purchasing systems are going to put you at a competitive disadvantage, and may end up costing you the win.
Still other contractors are going to ignore the business systems clauses in their contracts. Those contractors will be surprised when the auditors and/or reviewers show up, and they’ll be even more surprised when their system deficiencies lead to payment withholds. They will convene tiger teams and executive steering committees, and bring in platoons of expensive outside consultants, and they’ll scramble in a “Chinese fire drill” until, sooner or later, the payment withholds will go away. And then they’ll congratulate themselves and award bonuses to the same people who ignored the issue until it was too late.
Don’t be those contractors.
If you have business system clauses in your existing contracts, or if you think you will be bidding on contracts subject to the business system administration regime, then now is the time to get started. Don’t put it off for another day.
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