How DOD Exploits and Abuses Its Small-Business Contractors
In our last post, we discussed the problems faced by Quimba Software, a small business that was awarded a Phase 2 Small Business Innovation Research (SBIR) contract by the Department of Defense—and who ran into problems with DCAA audit findings, a DCMA Administrative Contracting Officer (ACO) Final Decision, and an appeal before the Armed Services Board of Contract Appeals (ASBCA) that was rejected without a hearing on the merits because it was filed one day too late. We understand that Quimba is currently pursuing its case at the U.S. Court of Federal Claims.
What makes Quimba different from most small businesses is that they know how to publish a blog and get their story out on the internet. The Quimba blog is well-written and clearly explains the problems that the company has experienced. More importantly (as we reported) the blog is chock-full of “lessons learned” that should be a “must-read” for any other small business that is seeking to do business with the DOD. We published some of those hard-won pearls of wisdom in the last post (link in the first sentence of this article).
Quimba’s experience with DCAA and DCMA is not unique. In fact, Apogee Consulting, Inc. has recently advised two other small businesses that have had difficulties with Phase 2 SBIR contracts. In one case, the company---involved in innovative medical technology that could ultimately save lives of injured warfighters—was able to get us into the picture before any pre-award SF 1408-related activities were undertaken by the government. We informed the company that it had undercalculated its indirect cost rates, and the company had to decide whether or not to bring that fact to the attention of its Contracting Officer. (It could have made a perfectly legitimate business decision to “eat” the rate overrun.)
In the other engagement, the company was told by DCAA that its accounting system was inadequate because it didn’t structure and allocate its indirect costs in the manner that DCAA thought it should. (Note that the SF 1408 requirement is that indirect costs must be pooled and allocated in a “logical and consistent” manner—which provides the contractor with considerable latitude to choose its own methodology, so long as that methodology is not actually prohibited by any other applicable regulation.) The DCAA auditor (and the Supervisory Auditor) did not care at all about what the SF 1408 form actually required of the contractor; instead, they were very concerned about imposing a full CAS-compliant methodology on this contractor that was expressly exempt from CAS. Any push-back from the company would lead to a DCAA recommendation that its accounting system be determined to be inadequate, regardless of the facts and merits of the contractor’s actual practices. If the accounting system was found to be inadequate—regardless of the lack of regulatory support for that finding—then the company would lose its Phase 2 SBIR contract award.
Such is the life of a small business contractor that seeks to do business with the Defense Department.
This is not a particularly new concern for us. We have published several blog articles about DOD’s cavalier (and, in some cases, adversarial) treatment of its contractors, both large and small. For example, in this article, we discussed a mash-up of DCMA and DCAA policy positions that seemed problematic—especially if you were a DOD contractor. In a more recent article, we noted that the number of DOD suppliers had fallen by 14 percent, even as the Obama Administration implemented efforts to increase competition. In that article, we reported on discussions between senior DOD acquisition leadership and industry, in which the DOD leaders clearly stated that they did not consider themselves to be in a partnership with their suppliers—which was a 180 degree reversal from the express description of the Pentagon’s relationship with its suppliers during the late 1990’s and early 2000’s.
What changed? We assert that nothing changed except the attitudes of the Defense Department’s acquisition senior leadership.
But it’s not just Quimba or Apogee Consulting, Inc. discussing the problematic business environment fostered by the acquisition leaders at the Pentagon. No, this is not just “sour grapes” by some disappointed contractor and an outside consultancy. It’s also the opinion of House Armed Services Committee (HASC), who told the Pentagon to “improve the Defense business environment.” We quoted extensively from the HASC Report, including this bit—
The Panel also found that a number of hurdles make it challenging for companies to compete for defense contracts. The plethora of regulations specific to government and defense contracting dissuades many companies from competing for government contracts. The acquisition process is often bureaucratic and rigid, with insufficient flexibility to allow appropriate application of management, oversight, and monitoring of small businesses. The defense business environment is also complicated, and some argue hindered, by current export control requirements. The high rate of personnel turnover in government acquisition personnel, from program managers to Defense Contract Audit Agency (DCAA) auditors affects the quality and consistency of policies. Oversight and management agencies such as DCAA are under-resourced and lack consistently trained, skilled personnel, hampering the ability of these agencies to provide appropriate contract oversight and management. In addition, a backlog of audits has caused DCAA to prioritize work on high dollar contracts, leaving unresolved many of the open audits of small businesses who are holding small dollar contracts.
There were many anecdotes offered as support for the HASC Panel’s findings and recommendations. We published many of them. For this article, we note this one—
Several participants expressed frustration with DCAA’s failure to close out incurred cost audits in a timely manner. One company was last audited in 2005 and the audit was still open, costing the company an estimated $3-4 million in lost business over the last six years. The participant noted that the contracting officers requested indirect rate audits but DCAA was non-responsive and the company was prohibited from moving forward from a successful SBIR Phase II contract because the audit was still open. It was suggested that the Panel should consider mandating maximum turn-around times for audits such as 60 days for rate audits, and 6 months for incurred cost audits. It was also suggested that contracting officers should be allowed to issue letter contracts so that they can proceed with a contracting action while an audit is still open and make adjustments, if necessary, after the audit is closed. Another participant felt that turnover and inexperience with DCAA auditors was part of the problem. It was stated that every year they get a new auditor and they have to start all over because the new auditor uses different processes and has different audit requirements. In order to address this issue, it was suggested that DCAA should be required to report performance metrics in order to highlight regional shortcomings and more uniform [military member] involvement at DCAA was needed to balance the inexperienced civilian workforce.
(Emphasis added.)
Among the many recommendations given to the Secretary of Defense from the HASC Panel, we noted the following—
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The Directors of DCMA and DCAA should ensure coordination between their agencies and the SBA when conducting audits that include factors of interest to or duplicative of reviews conducted by SBA. For example, SBA’s Commercial Market Representatives visit large contractors with subcontracting plans to assess compliance with the subcontracting plan. However, DCAA also looks at subcontracting as part of its cost audits, especially when subcontracting performance is related to a company’s award fee. Furthermore, DCMA also reviews subcontracting performance and processes. These three entities should coordinate their reviews to more efficiently conduct audits and to potential reduce the number of audits performed.
So, clearly, it’s not just us and it’s not just Quimba. The Pentagon has an attitude problem at its senior leadership level, and that bad attitude has infected the ranks of auditors and Contracting Officers who execute oversight on the thousands of DOD contractors, both large and small. The attitude is driving away suppliers—especially small business who pursue SBIR funding in the hope of developing innovative products.
What might be done to address the problem?
Well, we can’t change the attitudes of Messrs. Assad, Williams, and Fitzgerald. But we can offer some potential regulatory solutions, including—
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Exempt contract awards to small businesses from the requirements of FAR 16.303-1(a)(3). In other words, permit small businesses to receive cost-type contracts without the need to have “adequate” accounting systems.
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If you don’t like that one, then perhaps the SF 1408 should be revised, such that there are two Standard Forms for documenting the adequacy of a contractor’s accounting system—one for large businesses and one Form for small businesses. The small business SF 1408 should have relaxed requirements.
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Require DCAA to revise its 17740 Assignment (Pre-Award Survey of Prospective Contractor Accounting System). Direct auditors that if they are going to challenge a contractor’s indirect cost allocation, they must provide a regulatory citation to support their position. If there is no regulation that prohibits an allocation methodology, it should be accepted.
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DCMA and DCAA should offer an avenue of appeal for contractors who believe they have been wronged—particularly with respect to the results of a pre-award accounting system survey. There should be an SF 1408 “center of excellence” and it should be staffed by personnel well-versed in the SF 1408 requirements. The center of excellence should review disputed findings, just as a DCMA Review Board reviews disputed findings in other areas.
With respect to that last recommendation, we note that DCMA has created a portal for contractors to elevate concerns. It’s right here. That’s a good start. We wonder where DCAA’s equivalent “customer complaint” portal is located? But the fact of the matter is that many contractors (especially small businesses) will be intimidated and too worried about potential retaliation to use the function provided. (Which is a shame, actually.) So we question the ultimate utility of the portal while we applaud its existence.
To wrap this up, after decades of dealing with DCAA and DCMA as they provide oversight over both large and small contractors in just about every industry you can imagine, we are convinced that the current oversight environment is by far the worst and most adversarial that we have ever experienced. That adversarial environment is exacerbated by far too many inexperienced and poorly trained oversight officials, as well as the increasingly adversarial attitudes of those in senior civilian leadership positions.
It’s bad. And for small businesses like Quimba, it’s almost unimaginably bad. The companies that need assistance the most, either don’t know from where to obtain it, or can’t afford to pay top-notch advisers. The result is a tsunami of litigation and the flight of innovative suppliers from the defense industrial base.
Another Voice in the Wilderness
“He said, I am the voice of one crying in the wilderness, Make straight the way of the Lord, as said the prophet Isaiah.” – John 1:23, King James 2000 Translation
Well, we were lucky enough to make the acquaintance of the owner of a small business who not only has had significant “lessons learned” about dealing with DCAA and DCMA, but has blogged about the company’s travails. The blog is called “Small Business Government Contracting: Adventures in Dealing with DCMA, DCAA, and Other Government Bureaucrats.” From the first post, we were hooked: it’s a must-read.
We had never heard of Quimba Software before we received an e-mail from a company executive, but maybe we should have—these Quimba folks are no strangers to disputes with the Department of Defense. This ASBCA decision sheds some light on why the Quimba folks are so passionate in their contempt for the DOD bureaucracy that, in their view, has wronged them.
It’s a short and to-the-point decision. Quimba received a Contracting Officer’s Final Decision (CoFD) disallowing certain deferred executive compensation costs. Quimba filed an appeal, but did so on the 91st day after receipt of the CoFD. Unfortunately for Quimba, the ASBCA Judges strictly enforced its 90-day appeal period, and dismissed Quimba’s appeal without hearing any arguments on the merits. End of discussion.
It may sound harsh, but that’s the way the government contracting game is played. What seems unfair to one party (Quimba) seems perfectly fair to the other party (the United States). The United States, the Sovereign, consents to be sued, but only within strictly enforced circumstances. If you fail to follow the playbook, you lose the game.
Now, we could take off on a rant here ourselves. We could rail that treating the US Federal government as “sovereign” is a hold-over from English jurisprudence. The English had a Sovereign, but we fought a revolution in order to rid ourselves of that concept of governance. Treating the Federal government as a “sovereign” perpetuates an anachronistic system that has no place in freedom-loving America. But that kind of ranting does no good in this context, since Quimba (and all other government contractors) consent to this treatment when they execute their contracts and accept the government’s money.
Sure the game is rigged, but if you don’t bet you can’t win.
So with that background, let’s start quoting some of Quimba’s “lessons learned”—clearly published with the intent of warning other small businesses about the landmines that Quimba tripped in its dealings with the Department of Defense.
About DCAA:
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The biggest mistake many entrepreneurs new to the government contracting game make is to think DCAA has, or under any miraculous set of circumstances, will have even an iota of interest in your success.
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I promise you, however, that a DCAA auditor that consistently does not find “something wrong” with contractor cost calculations will probably be banished to the children’s table at their annual agency picnic! Same is true, though with a twist, of DCMA staff, particularly the Administrative Contracting Officers or the ACOs. An ACO who fails to perform as a de facto employee of DCAA and follow the auditor “recommendations” will probably not be invited to DCMA’s holiday party.
About DCMA:
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In my direct experience, however, most ACOs simply do not care enough about small businesses to do anything but try to get them off their “to do” list as fast as possible. … In my direct experience, DCMA also intentionally fosters a defective management structure that promotes lackadaisical and inconsistent enforcement that breeds a contemptible lack of supervisory sophistication. … In short, in my direct experience, DCMA has intentionally structured a management environment that promotes and rewards incompetence by its staff, particularly the ACOs.
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I would in fact venture as far as to say that you are NEVER done negotiating terms and pricing on any contract until it is closed. Up until then you should absolutely expect the government, through its duly authorized employees in DCAA and DCMA to focus on reducing your contract’s value – or the total amount you will ultimately receive on your contract regardless of what they themselves agreed to, either explicitly or implicitly. This is cheating.
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Simply stated, just because DCMA and DCAA represent the US flag, it does not mean their policies, or their employees, will either be fair or reasonable. The bureaucrats you will be dealing with care only about what any bureaucrat cares about – stay under the radar, get the paycheck, and build the pension. These bureaucrats also do know that any contract dispute is likely to spend several years in the agency’s internal administrative processes before starting on a long and windy legal road. Given that it could take a decade or more before a dispute is resolved, most bureaucrats simply push it off on to the next guy. At least this has been our experience. And the guy who is stuck with you at the end of this musical ACO game is sure going to let you know just how unhappy s/he is that you do not simply submit to the bureaucrat’s will.
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Throughout this ordeal, it has been my personal experience that DCMA staff are intentionally hostile and abusive – and they like it that way. It has also been my experience that there are absolutely no management controls in DCMA to rein in the type of abuse we have been subject to over the past FIVE , yes F-I-V-E years. How hard is it, we have continually wondered, to verify that ACO [Named Withheld] made an error and correct it?
Well, we here at Apogee Consulting, Inc. feel Quimba’s pain. The Quimba folks are expressing the frustration that many of us feel, all too often. Let’s keep in mind that Quimba was awarded an SBIR Phase 2 contract, so it (theoretically) had something that the DOD was interested in obtaining. But no that’s not going to be happening.
So in this story, there are no winners—only losers. Quimba is (quite possibly) out lots of money—and, even if the company ultimately prevails at the Court of Federal Claims, they are out quite a lot of attorney fees. The Defense Department loses out on some promising software. And we, the taxpayers, lose out because our taxes are going to a contract dispute that should be easily solved—if anybody cared to negotiate.
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Plea Bargain Converts Multiple False Claims Into A Single False Statement
Article removed by request.
Are You Letting HR Kill Your Company?
We’ve recently posted a couple of articles about employee development and workforce management in times of budgetary pressure. We’ve tried—perhaps too subtly—to nudge readers towards thinking about their employees and about strategies for ensuring that their organizations are positioned to survive the looming budget cuts, and perhaps even thrive.
Have we been too subtle? Heck, we came right out and begged you to take action on these issues, back in February.
While the idealist hopes you’ve invested time thinking deep thoughts about these issues, the cynic is pretty sure you’ve blown them off. We’re sure you had good reasons: focusing on program execution is always a good rationale for ignoring more long-term needs. If other excuses were needed, we expect budget planning or mid-year forecast efforts were trotted out like show horses. In other words, we bet you’ve been ignoring your workforce issues and will continue to ignore them … and then of course you’ll complain when your operations start to become negatively impacted.
We figure you need another swift kick to the keister.
So here’s yet another article on the boring, yet critical, topic of workforce management. Print it out; show it to you co-workers. Post it on the bulletin board. Send a copy anonymously to HR. We don’t care (just make sure you note it came from www.apogeeconsulting.biz). But do something about this, will you please?
Our first point is brought to you by DefenseNews, who reported that defense contractors “are struggling to keep talent” in the budgetary downturn. The DefenseNews article stated—
Cutting employees is easy. Keeping the right ones is difficult.
While U.S. defense companies will likely continue to reduce staffing as part of the defense downturn already in progress, the process of sorting the critical from the expendable is a concern for many senior executives.
Much of their fear stems from a glance at history: The aerospace and defense industry didn’t handle the last downturn well. Not only did a loss of critical knowledge affect efficiency, but in many cases companies were ill-prepared to support government needs when greater spending returned.
The article quoted Steve Grundman as saying—
‘In general, I think reductions in the last downturn were focused on ‘capacity’ and capital investments, not people, and what they learned was that the focus should have been on ‘capabilities’ and skills instead,’ Grundman said. ‘Compared to finding a good systems engineer, it’s comparatively easy to build a factory, an insight I’m not sure was so widely shared 20 years ago as it is today.’
One of the time-honored tactics for managing workforce cuts is to “stack rank” (sometimes called “rack and stack”) employees. Employees in each organization are ranked in comparison to each other. Often this is an annual process; but when workforce cuts are being contemplated, it is traditionally one of the first steps that management takes. We understand why. Generally speaking, you want to lay-off your low performers and retain your high performers. Thus, you first need to identify who is who. Makes sense, right?
Well, maybe not.
Recently, we have come across articles and discussions which assert that “stack ranking” is a fairly terrible approach to workforce management—especially when implemented on a routine basis and especially when a pre-selected “grading curve” is issued by upper management. The pre-selected approach was made famous by Jack Welch and the General Electric Company, where the lower 10% of the workforce is identified annually—and then fired—came in for special criticism.
The first salvo came from an article about why Microsoft is no longer the leading-edge of technology innovation. One of the primary reasons for Microsoft’s lagging performance in innovation and development, according to the author, is its preoccupation with forced rank stacking. A summary of the article stated—
Analyzing one of American corporate history’s greatest mysteries—the lost decade of Microsoft—two-time George Polk Award winner (and V.F.’s newest contributing editor) Kurt Eichenwald traces the ‘astonishingly foolish management decisions’ at the company that ‘could serve as a business-school case study on the pitfalls of success.’ Relying on dozens of interviews and internal corporate records—including e-mails between executives at the company’s highest ranks—Eichenwald offers an unprecedented view of life inside Microsoft during the reign of its current chief executive, Steve Ballmer, in the August issue. Today, a single Apple product—the iPhone—generates more revenue than all of Microsoft’s wares combined.
Eichenwald’s conversations reveal that a management system known as ‘stack ranking’—a program that forces every unit to declare a certain percentage of employees as top performers, good performers, average, and poor—effectively crippled Microsoft’s ability to innovate. ‘Every current and former Microsoft employee I interviewed—every one—cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees,’ Eichenwald writes. ‘If you were on a team of 10 people, you walked in the first day knowing that, no matter how good everyone was, 2 people were going to get a great review, 7 were going to get mediocre reviews, and 1 was going to get a terrible review,’ says a former software developer. ‘It leads to employees focusing on competing with each other rather than competing with other companies.’
Teresa Nielsen-Hayden had this opinion to offer about forced rank stacking, at her website’s blog (“Making Light”)—
[Rank stacking] strikes me as magical thinking: you make your company more competitive by making its internal departments and individual employees compete with each other. Wherever it comes from, IMO it’s profoundly dysfunctional. Business is about getting work done — unless you’re in a line of business where that work consists of figuring out who’s a star and rewarding them, which is rare.
Companies and departments are by nature internally cooperative clusters of people who are working on the same projects and/or issues. Turning employee evaluations into a game of winners and losers and stars, and employees into competing gameplayers, is not a good way to get work done. …
Stack ranking also fails to take into account what kind of work is being done. Sometimes fast-moving highly profitable achievements rest on an earlier foundation of slow incremental work on less-than-tractable problems. It’s not unusual for a department to do both sorts of work. Which kind gets rewarded for being productive? Which gets the bad reviews and firings?
I’ll absolutely question the use of stack ranking as a motivational device. Doing good work, looking ahead, helping to create a strong, smart organization, and refraining from doing evil should be enough to get any employee a good annual review. If what it gets them is a note in their permanent record saying it wasn’t enough, and they should have done more, they might feel motivated to try harder next year, and in a few cases may try harder the year after that; but mostly not, and sooner or later they’re all going to lose heart. People want to care about their work. If you break their faith in their job, it’s hard to win it back.
It’s a miserable system for managers, too. Say you’ve put together a great department — competent, well assorted, good work proprioception, with high productivity and high morale. Now impose a rating system that tells you that your department manages its people neither better nor worse than any other department. Be forced to label 20% of your people winners, without reference to the rest of the department’s work that makes theirs possible. Label 70% of them as timeservers and underachievers, no better than they should be. Label 10% of them failures, or even fire them, when you’ve spent all year trying to help them be good at their jobs.
One of the commenters on her site offered this observation—
I'll not knock evolution: blind competitive pressure has created some pretty amazing things over the past billion years. One of things it has consistently produced, however, is cooperation. Time and again, it's turned out that in a cutthroat take-no-prisoners dog-eat-dog existential battle of all against all, the most winningest strategy is working together. What these competition-inducing schemes to improve upon the inefficiency of group production constantly miss is that group production originates in the first instance by out-competing everything else. Cooperation is where competition leads. Trying to use blind evolution to improve upon cooperative systems is like noticing that great square wheel you made is getting rounded on the corners from wear and setting about sharpening them back up.
This is more than simply the opinion of one (or two) individuals. If you visit Nielsen-Hayden blog post (link above) you’ll find links to several academic and business magazine articles on the topic that share this point of view. The consensus seems to be that forced rank stacking is bad for employee morale, hurts productivity and project execution, and stifles innovation. And it’s more than simply one or two or seven peoples’ opinions—it’s also questionable on a statistical level: it’s bad math.
As Ms. Nielsen-Hayden wrote—
The ‘grading on the curve’ aspect of it is also defective. Basic management theory limits the number of employees that can report directly to a single boss. Any department that’s small enough for everyone in it to be reporting to the same boss is too small a sample for that boss to be grading them on a rigid 20-70-10 curve.
Besides, as any kid who got curve-graded in school can tell you, it’s no guarantee of high-quality work. If all the students in a curve-graded class slack off, they don’t all get a D or F. Instead, it gets easier to get a B. If all but a few students slack off, it’s a good bet that the ones who don’t will get an A. Now translate that into the essentially cooperative workplace. Is it really a good idea to reward employees when their co-workers fail?
Let’s posit for a moment that the “rack and stack” practice is bad. So why do you let your HR Department make you do it? And that is the critical question, isn’t it? Why do you let your HR folks and senior leadership perpetuate a practice that hurts your company?
We might speculate that the reason for the perpetuation of the practice is that it’s “traditional”—i.e., it’s the way it’s always been done. Nobody who makes the decisions in this area knows any other way.
But we all know that the worst reason to do anything is “because it’s always been done that way.” (The second worst reason is “because we don’t have enough budget to do it any other way.”) If that’s all they’ve got for a rationale, then they’ve got nothing at all. And we think you should call them on it.
One more point apropos to this issue, again offered by Ms. Nielsen-Hayden—
If you know in advance that 10% of the employees in your department are going to get fired, one logical answer is to always keep a few redshirts around. This frees up the rest of you to stop worrying, and work on the stuff you were hired to do. Any good work you get out of the redshirts is pure profit.
Perhaps that’s a bit cynical, but it’s also the logical answer to the problem of forced rank stacking.
So as you ponder the current and future budgetary pressures imposed on your organization by customers and the general marketplace, we ask you to remember that you need to plan for survival. You need to plan for the long-term future. And that means managing your current workforce, developing employees to become the next generation of leaders, and keeping your HR Department from getting in the way.
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