Pratt & Whitney Joins 5% Withhold Club
This week Aviation Week & Space Technology reported that DCMA has decided to start withholding 5% of its payments to United Technology’s Pratt & Whitney subsidiary because of significant deficiencies in the company’s Earned Value Management System (EVMS). AWST reported—
EVMS decertification is not an indictment of a company’s technology or ability to deliver quality equipment. It does, however, indicate an inability of the Pentagon to certify the data on a company’s progress in executing programs. This means that the data could be flawed. ‘The EVM requirement is meant to protect taxpayers from overbilling and focuses on the business systems defense companies use to estimate costs for bids; purchase goods from subcontractors; manage government property and materials; and track for costs and schedule progress,’ said [the spokesperson for the F-35 Joint Program Office].
Yeah. That last part confused us as well. We’ll just assume he meant to describe the Business System DFARS clause, and move on.
That same AWST article also reported—
Pratt is working on four areas to improve its EVMS compliance: updating documentation to better align with process, improving how scheduling tools are managed and integrated, better cost estimating and forecasting, and improving planning for work packages. The company has submitted corrective action plans for each to DCMA for approval.
So there you go.
In that same article, AWST updated the status on Lockheed Martin’s EVMS-related payment withholds. We last reported on LockMart’s problems right here. That was about a year ago. Since then, DCMA has decided to drop its payment withhold back to 2 percent. AWST reported—
In late August, DCMA reduced the withholding on Lockheed Martin to 2% when it decided the company was ‘making significant progress on the approved corrective action plan,’ says Kenneth Ross, a Lockheed Martin spokesman. However, getting recertified is a painstaking process, as demonstrated by the long time that Lockheed Martin has been decertified.
Just to recap:
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DCMA “decertified” LockMart’s EVMS (at its Fort Worth, TX plant) in October, 2010
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In March, 2012, payment withholds of 2 percent were imposed
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Payment withholds were increased to 5 percent in June, 2012 and the follow-up audit to evaluate LockMart’s corrective action plan was delayed for a year
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In August, 2013, the follow-up audit found that LockMart had made significant progress on its corrective action plan, and payment withholds were reduced back to 2 percent.
So that’s the kind of experience that Pratt & Whitney can look forward to, now that it’s joined the 5 percent withholding club.
DOD Closes Loophole After KBR LOGCAP SNAFU
So what’s the deal with KBR and its government customer, the United States Army?
Regardless of one’s position on the use of contractors to support overseas military forces, it’s hard to argue that those military forces can go to war without lots and lots of contractors to build the camps, run the mess halls, and ensure that food, water, and fuel get where they’re needed. Pete Singer (of the Brookings Institution) has made a nice career writing about the quandary of having private military contractors in a war zone; and even he admits we “can’t go to war without ‘em” (though he argues that “we can’t win with ‘em” as well).
Even a professional Army logistician writing a fairly academic article in a professional bulletin acknowledges that “a significant amount of the logistics support in today’s combat zone is provided by contractors.” (Though in fairness he also express some serious concerns about that practice.)
Given the essentially inarguable fact that logistics support contractors (such as KBR) are absolutely necessary to a successful deployment, then why are KBR and the Army at such loggerheads regarding aspects of KBR’s LOGCAP contract?
That strained relationship should be no secret to readers of this blog. Just so a site search on “KBR” and see the many articles we’ve written about that firm. You will see that KBR has been enmeshed in multiple legal battles with many plaintiffs—including the U.S. Government. Another blogger has compiled an archive dedicated to KBR LOGCAP litigation. More to this article’s point, early in the summer the Federal Times carried an article that discussed “the sharply fractured relationship between the Army and one of its biggest contractors.” The two parties just weren’t getting along.
At the heart of the dispute was the government’s desire to have KBR propose its LOGCAP III demobilization and contract close-out efforts on a firm, fixed-price basis—as opposed to every other task order on that contract, which were proposed and awarded on a cost-reimbursement basis. According to the article, KBR felt forced to file its own lawsuit (as plaintiff instead of defendant) “seeking to keep to the existing cost-reimbursable terms” of its contract, and arguing that “closeout tasks can’t be estimated, citing costs stemming from litigation with subcontractors and tort cases filed against KBR by military and civilian personnel as well as future unresolved audits.”
After searching at the Court of Federal Claims (COFC) website, we were unable to find any decision regarding KBR’s suit, likely because it’s too soon.
But we did notice that the DOD has fdecided to close any regulatory loophole that support contractors might be able to exploit, just in case the lawsuit doesn’t go its way. On August 30, 2013, the Directorate of Defense Procurement and Acquisition Policy (DPAP) issued a DFARS Class Deviation, clarifying that the contractor is responsible for its own demobilization activities, and mandating submission of a “demobilization plan” to the cognizant Contracting Officer prior to the end of the contract period of performance.
There are several interesting aspects of the clause that accompanied the Class Deviation, among them the requirement that the Contractor become “liable for all cleanup, clearing, and/or environmental remediation expenses incurred by the Government in returning a Government facility to its original condition.” Talk about an inestimable scope of work! Fortunately, KBR did not have such a clause in its contract, though the DPAP letter of transmission is curiously ambiguous as to whether the clause is to be retroactively incorporated in existing contracts, such as the LOGCAP III contract held by KBR since 2001.
Meanwhile, over at the Court of Appeals, Federal Circuit, we found a very recent decision affecting KBR. It concerned KBR’s appeal of the COFC decision that cost the company some $30 million because of ineffective subcontractor management. We wrote about the original decision right here (note: that link goes to Part 4 of a four-part series of articles on the case). Both parties appealed aspects of the original decision. KBR argued that it was entitled to the full amount of payments to its subcontractor, which had been determined to be “unreasonable” in amount and, thus, unallowable.
Suffice it to say that KBR’s arguments were unavailing and it lost its appeal.
Unfortunately (for KBR), the government’s appeal was not dismissed in its entirety. In particular, the Appellate Court found that KBR was “vicariously liable” under the Anti-Kickback Act for kickbacks received by two of its Food Service Managers. (Judge Newman dissented from that portion of the ruling.)
That is going to cost KBR some more money when the COFC Judge calculates damages, which will be added to the roughly $30 million in shareholder funds that have already been lost. But the foregone funds do not resolve the relationship problems between KBR and its Army customer(s), nor does this decision resolve the numerous lawsuits still awaiting decision.
Former Secretary of Defense Rumsfeld famously said, “You go to war with the army you have, not the army you might want or wish to have at a later time.” It has become apparent that KBR went to the field with the management team it had, not the management team it may have wanted or wished to have at a later time. In particular, we can (with 20/20 hindsight) see that KBR’s management of its subcontractors was particularly weak, and its anti-corruption controls were similarly weak.
As we’ve written before (many times), effective subcontractor management is the key to effective program execution. KBR keeps proving our assertion, over and over.
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Still Here
Yeah, it’s been a while since a blog article was published. As I told a concerned reader, I’ve had an article half-written for too long now. (Either an article gets written in one fell swoop, or it dies from lack of passion.) Every so often I pull it up and type a few more words … but so far it’s been a painful process akin to pulling teeth without anesthesia.
I’ve also been thinking about how the FAR Councils don’t understand what a final cost objective is, and how that lack of understanding negatively impacted the June 2011 revisions to the 52.216-7 Allowable Cost and Payment clause. But that article’s going to take quite a bit of work, and I can’t find the time or the energy.
I can find neither the time nor the energy to get articles written right now, because of both professional and personal issues. First, I’ve been up to my eyeballs with work at my primary employer. We’ve got a new incurred cost audit started and DCAA is playing hardball right now. (As is their right. No whining here.) And I’ve been having a time of it in the personal realm as well. Moving one’s family half-way across the country and putting the kids into new schools has a way of sapping a person’s attention, you know?
That’s not to say everything has been doom and gloom. It’s just that in the larger scheme of things, writing blog articles falls toward the bottom of the stack, somewhere between posting updates on Facebook and reading new headlines on Fark.com. Far below new Season 3 episodes of Person of Interest.
Which is to say: Please be patient.
I have not given up writing articles for this website. But as I told you, this is hiatus time.
I will return.
In the meantime, I am very pleased that the DOD has told DCMA and DCAA and DFAS folks to come back to work. Although I have professional differences with many civil service employees at the Department of Defense, nobody should be treated as a pawn in a game of power politics.
Welcome back to work, folks.
Going Paperless
Many readers know that DCAA’s current audit procedures lead auditors to ignore Excel spreadsheets and the like and, instead, obtain original source data for evaluation. The rationale for that approach is that spreadsheets can be inaccurate or, perhaps, deliberately manipulated. Thus, they are no substitute for original source data from the accounting or purchasing systems.
It’s hard to find too much fault with that approach—though it is annoying and inefficient. It’s particularly galling to those many contractors who are being audited on information processed years (or perhaps even a decade) ago. In at least one case, we had to consider rehosting a legacy accounting system that that had been abandoned five years prior to the commencement of the audit, simply to provide original source data to the DCAA auditor. (Fortunately, when we pointed out the cost of that exercise to the auditor another approach was agreed-upon.)
So the more current DCAA is in performing its audits, the more the agency’s policy on original source data makes sense; conversely, the older the data being audited, the less the policy makes sense to us. Unfortunately, as many of us know all too well, DCAA is years behind and prospects for “catching up” by 2016 (which is the commitment date that the audit agency has made to Congress) are—shall we say?—dim. Consequently, too many audits deal with data that is too old.
What’s interesting is that the FAR prescribes some limits on the length of time a contractor is required to retain certain data. FAR 4.705-1 discusses retention periods for financial and cost accounting records; 4.705-2 discusses retentions periods for pay administration records; and 4.705-2 discusses retention periods for acquisition and supply records. It is quite possible that the prescribed retention periods will have expired before DCAA gets around to asking for the records.
In such circumstances, DCAA auditors (and others) point to FAR 31.201-2(d), which states—
A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported.
We have not seen the apparent tension between the prescribed record retention periods found in FAR 4.705 with the requirement found at FAR 31.201-2(d) resolved by any legal decision … yet. We suspect that the DCAA audit backlog, combined with the audit policy that requires examination only of original records, may lead to a Court addressing that tension sooner rather than later.
But that’s not what we want to discuss today.
We want to discuss a related topic, which is the policy position found at FAR 4.703(c). At that section, we find the policy that permits a contractor to store its records electronically, rather than retaining original paper copies.
Nothing in this section shall be construed to preclude a contractor from duplicating or storing original records in electronic form unless they contain significant information not shown on the record copy. Original records need not be maintained or produced in an audit if the contractor or subcontractor provides photographic or electronic images of the original records and meets the following requirements:
(1) The contractor or subcontractor has established procedures to ensure that the imaging process preserves accurate images of the original records, including signatures and other written or graphic images, and that the imaging process is reliable and secure so as to maintain the integrity of the records.
(2) The contractor or subcontractor maintains an effective indexing system to permit timely and convenient access to the imaged records.
(3) The contractor or subcontractor retains the original records for a minimum of one year after imaging to permit periodic validation of the imaging systems.
Moreover, in the next section (4.703(d)), we find the following policy—
If the information described in paragraph (a) of this section is maintained on a computer, contractors shall retain the computer data on a reliable medium for the time periods prescribed. Contractors may transfer computer data in machine readable form from one reliable computer medium to another. Contractors’ computer data retention and transfer procedures shall maintain the integrity, reliability, and security of the original computer data. Contractors shall also retain an audit trail describing the data transfer. For the record retention time periods prescribed, contractors shall not destroy, discard, delete, or write over such computer data.
Accordingly, it’s made plain as day that contractors can shred, burn, or otherwise dispose of their original source documents, so long as they maintain electronic copies for the required retention periods—and otherwise comply with the FAR requirements quoted above.
DCAA has finally gotten around to acknowledging the public policy found in the FAR and, as a result, issued MRD 13-PPS-16(R) on August 15, 2013. We received an advance copy of the MRD, courtesy of a regular reader. You will be probably be able to find the same MRD on the DCAA website, sooner or later. In the meantime, we will discuss some of the salient points of the audit guidance.
The MRD directs auditors to “test the contractor’s scanned images annually as part of an ongoing audit being performed at the contractor (e.g., incurred cost, proposal audit, etc.).” In other words, the testing of the contractor’s ability to accurately scan images effectively became another Mandatory Annual Audit Requirement (MAAR)—even though no separate activity code for the annual testing was provided. We have an opinion on the MAAR audits, and we discussed that opinion here.
There’s some stuff about when to perform the testing and how the testing is not the same thing as testing a contractor’s internal controls. But in the accompanying FAQ, we found the following points that we think worth sharing. (Note: Italics indicate emphasis added.)
Question 2: The contractor scanned a depreciation schedule originally prepared in Excel, but did not keep the original Excel file for 12 months. Is this covered by the new guidance?
Answer: No. This guidance only addresses the scanning of paper invoices. It does not address the scanning of financial and cost accounting records.
Question 9: I am performing an incurred cost audit for FY 2008, and it has been determined that my audit will include testing of the contractor’s scanned images. Do I test documents for FY 2008, or for the last 12-month period?
Answer: If it is determined that you will include procedures to test the contractor’s scanned images as part of your audit, you are required to look at the scanned images for the preceding 12-month period. However, if testing of the scanned documents was not performed for the FY 2008 time period, you also should determine if the original documents for that time period are available. If they still are available, testing of the scanned images for FY 2008 also should be performed to allow reliance on the scanned images during the ongoing audit
We found it interesting (to say the least) that the guidance only addresses “scanning of paper invoices” and not scanning of financial and cost accounting records. We cannot think of a reason why the audit guidance wouldn’t address the entire spectrum of scanned images, since the FAR does exactly that. We also find it interesting that, according to the MRD, testing of scanned images would need to take place 5 years after the fact in order to rely on them during an audit.
Of course, the most important gap in the guidance is the one we raised at the beginning of this article. Contractors do not, in our view, need to retain source documents in perpetuity pending the commencement of a DCAA audit at some indeterminate date in the future. Rather, it seems quite clear to us that a contractor can dispose of its original documents after the retention period prescribed by the FAR has passed. Moreover, we noted that contractors are only required to retain the electronic data “for the time periods prescribed.” After those dates have passed, contractors would seem to be able to purge their electronic data—including but certainly not limited to scanned images—at their discretion.
If DCAA comes calling years later, asking for hard copy or scanned images, we would think the contractor should be able to say “not available” without any repercussions. On the other hand—as we noted—we know of no legal decision that says our analysis is correct. Thus, we suspect most contractors will be reluctant to be the first in line to tell a DCAA auditor, “Sorry; go fish.”
It seems that going paperless is a difficult thing to do when one is a Government contractor.
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