DOD Can Save 20 Percent Simply by Being a Better Customer
Nick Sanders
Those of us who’ve been around the block once or twice remember the 1994 Coopers & Lybrand study (entitled “The DOD Regulatory Cost Premium: A Quantitative Assessment”). The C&L study identified 10 regulatory cost drivers that, together, “increase[d] the price DOD pays for goods and services by18 percent.” That study was one of the drivers that pushed Clinton-era “acquisition reform” and led to ground-breaking pieces of legislation such as the Federal Acquisition Streamlining Act (FASA).
There is some irony in the fact that the Obama administration has spent significant efforts in moving away from the flexibilities granted by FASA and other Clinton-era reforms. In other words, our view is that the Obama administration’s “acquisition reform” efforts consist largely of undoing the Clinton administration’s acquisition reform efforts, by reducing flexibility and facilitating a bureaucratic oversight regime that is seemingly designed to inhibit efficient acquisition of goods and services. The back-and-forth “reform” efforts of the two Democratic Presidents seem to embody the swings of the “pendulum” that everybody says describes the regulatory burdens of the defense acquisition environment.
Thus, we felt a distinct frisson of déjà vu when we sawa recent article in Federal Computer Week, telling readers that “trust may be the key to cost savings” for the Defense Department. It was like the C&L study had been reborn 18 years later. Perhaps some lessons need to be relearned every generation.
What lessons? Well, it’s simple, really. The DOD can save money by being a better customer, by being less adversarial and more trusting. The Pentagon’s distrust of its suppliers is not only inefficient, but it’s expensive as well.
The FCW article asserted that—
DOD currently spends $400 billion each year acquiring products and services from its contractors. About $100 billion of the money is spent on administrative costs, according to the study, based on interviews with 80 defense contractor executives.
By cutting what the report's authors consider to be unneeded bureaucracy, defense officials could reduce the department's costs by 20 percent. That could save roughly $20 billion each year, according to the report.
What’s driving the inefficient, expensive Pentagon buying practices? The FCW story stated—
… the adversarial relationships between buyers and suppliers have introduced costs in bidding and negotiations in contracts and slowed down the process of coming to acceptable terms and agreements. Think: standoff.
‘What’s more, high turnover in the core buying or supplying team can fuel dissent in relationships that are already on shaky ground, or reboot solid relationships and turn them adversarial,’ the researchers wrote.
In addition, vague contract requirements raise costs. Defense officials and contractors spend time ironing out differences in a changing interpretation of the requirements that could have been spelled out clearly sooner.
But the main villain is the Defense contractor oversight regime, which generates too much non-value-added documentation at the expense of efficient contractor practices. The FCW article stated—
‘The main villains are the development, collection, and generation of unneeded reports, documenting, and maintaining compliance processes, as well as educating and training staff on compliance processes,’ the researchers determined, according to the report.
‘From the contractors’ perspective, the Department of Defense requires too many reports, and it micromanages how contractors do their jobs,’ Ketchen said.
FCW linked to the report in question, which seemed to be more of an article from the May 2012 edition of Contract Management magazine. It had more to say on the topics we summarized above. We want to restate, clearly, the authors’ findings regarding the “adversarial” relationships between DOD and its suppliers. They wrote—
The nature of supply relationships can introduce unnecessary costs into the contract management process. Adversarial relationships raise costs related to bidding and negotiations in contracts (think standoff) and slow down the process of coming to acceptable terms and conditions.
As we stated at the beginning of this blog article, there’s nothing really new here. This is 1995 all over again. At that time, Dr. Gansler wrote about reducing non-value-added oversight activities and treating defense suppliers like trusted business partners, instead of like adversaries. The thing is, in this era of budget pressures, spending cuts, and possible sequestration, it’s important to remember that the DOD drives up costs in the name of “compliance” and “oversight”. Lockheed Martin CEO Stevensnoted his company’s ability to reduce overhead costs was hindered by DOD data requirements. That’s a statement borne out by the evidence, and is consistent with the findings of the article reported on by FCW.
Many compliance requirements are driven by statute/public law. Others are driven by regulation. But many others are driven by bureaucrats, who are more focused on complying with GAGAS and avoiding CIGIE “gigs” than they are on truly protecting the interests of taxpayers.
This taxpayer wants some moderation, some balance, in the Pentagon’s approach to contractor oversight.
Sequestration Equals Doomsday Scenario
Nick Sanders
Whether you call it CASE NIGHTMARE GREEN or Mutually Assured Destruction, the upcoming “sequestration” looks like a doomsday scenario for defense contractors—and perhaps for all government contractors.
The law firm Wiley Rein has a good synopsis of the danger posed by sequestration, right over here. The Wiley Rein attorneys wrote—
Under the Budget Control Act of 2011 (the Act), sequestration is the automatic reduction of spending triggered if Congress approves spending levels that exceed certain ‘caps’ set out by the Act. Although certain programs-Social Security, Medicaid, federal retirement programs and Medicare-are protected from the full impact of sequestration, spending reductions would occur largely across the board under the Act. The Budget Control Act calls for sequestration of spending from FY 2013 through 2021 and, unless Congress otherwise acts to limit spending, it takes effect January 1, 2013.
If sequestration occurs, $1.2 trillion in spending reductions are required from FY 2013 through 2021. Approximately $1.1 trillion of these reductions will come from reductions in both Department of Defense (DoD) and non-DoD program expenditures. Sequestration can be avoided under the Act if Congress otherwise acts to implement spending limitations deep enough to avoid the Act's triggers. On February 14, 2012, President Obama proposed a FY 2013 budget that, according to the Office of Management and Budget, avoids the statutory trigger. It does so by, among other things, proposing cuts that will reduce or eliminate altogether spending on a number of well-known federal programs, including numerous DoD contracts.
Thus, in the current economic climate, federal contractors must prepare for budget cuts-whether those cuts are imposed by sequestration or by the reduced spending necessary to avoid it.
The Wiley Rein folks predicted dire consequences if sequestration comes to pass—or even if deep budget cuts are made. Among the consequences they predicted are reduced government personnel and reduced customer responsiveness to contractor needs. But according to the Wiley Rein attorneys, the “most concerning issue” for Federal contractors is the “downsizing or elimination of key programs.” They wrote—
This prospect is not purely hypothetical. In November 2011, Secretary of Defense Leon Panetta outlined some of these potential impacts in a letter … Among other potential effects, Secretary Panetta cites short-term effects on such programs as Joint Strike Fighter (JSF), and the long-term prospect of multiple program cancellations.
The Wiley Rein attorneys offered some good advice for contractors concerned about the upcoming doomsday scenario. Among the pieces of advice:
Check contract status now and submit Requests for Equitable Adjustment (REAs) if appropriate before sequestration kicks-in.
If your fixed-price contracts are impacted by sequestration (either from “Stop Work” notices or other government-imposed changes) then be prepared to quantify impacts from the changes and submit REAs.
If you have cost-type contracts, be ready to respond to impact caused by deductive changes and/or partial terminations.
For all contracts, be ready to handle terminations for convenience. Have good people standing by, ready to advise and manage the situation. Consider contingency planning.
This recent article by Sarah Chacko at Federal Times forecasts “costly legal disputes [and] contractor payouts” from sequestration impacts. The article quotes William Roberts, an attorney at Wiley Rein, as follows: “There’s no planning going on to speak of within the government. They’re going to get caught flat-footed and have to deal with what programs to cut, what contracts to partially terminate.”
Another thing predicted by Roberts is that the government will hold contractors to the strict letter of the contract. For example, contractors that fail to strictly comply with Limitation of Cost/Limitation of Funds clause requirements may see their entitlement to additional funding be lost. Roberts was quoted as saying: “if you give the customer any legal way of saying, ‘You failed to provide proper notice, we’re not going to pay you,’ I think you can reasonably expect much stricter enforcement.”
The article also contained predictions by Alan Chovtkin, of the Professional Services Council, that the Obama Administration’s emphasis on use of fixed-price contracts was going to backfire, and end up costing taxpayers more than if cost-plus types had been used. The article quoted Chovtkin as saying—
Under fixed-price contracts, the government pays a set cost for a product or service. Because the contractor bears more risk if there are cost overruns, these contracts often provide sizeable payouts to companies if the contract is ended early.
Cost-reimbursement contracts — where the government pays the contractor for costs incurred — can be more easily adjusted because the scope of work can be changed without rewriting contract terms.
‘The irony is the public policy support for greater use of fixed price contracts may end up reducing the agencies’ flexibilities should there be a sequestration,’ Chvotkin said.
So here’s the thing. We are about five months away from sequestration hitting contractors the way that Fat Boy hit Hiroshima. A lot could happen between now and then. Certainly recent history leads us to expect a last-minute deal that would avoid the worst of the doomsday impacts. But we can’t count on that happening and neither should you. Sticking your head in the sand and crossing your fingers, hoping for the best, is no way to engage in contingency planning.
In this article, we’ve pointed to some reasonable steps one might take to prepare for sequestration, courtesy of Wiley Rein, Federal Times, and the Professional Services Council. We’re quite sure that there are other things you ought to be doing. For starters, why not create an ExCom team consisting of HR, Ops/Program Management, Finance, and other management functions to start thinking—and discussing—the unthinkable?
Note that the Wiley Rein attorneys didn’t think much of the Federal government’s proactive stance on the matter. So the bar has been set extremely low. Why not go ahead and beat it?
Pocketing Unearned Recruiting Bonuses Leads to Legal Problems for Soldiers
Nick Sanders
“Be all you can be.”
Sure. But we don’t think they meant “Take advantage of Army recruiting referral incentive programs to grab as much as you can grab.”
To date, eight individuals have been charged in a “wide-ranging scheme” to fraudulently obtain U.S. Army recruiting referral bonuses. Six of those individuals have pleaded guilty to their roles in the scheme. This Department of Justice press release announced that two of the six—Christopher Castro and Ernest Gonzalez—were recently sentenced for pleading guilty to one count of conspiracy to commit wire fraud.
According to the DOJ press release, Castro and Gonzalez were participants in a scheme where Recruiting Assistants (RAs) and Sponsors were provided with the names and Social Security Numbers of “walk-in” soldiers—i.e., people who decided to join the Army without being referred by anybody. So nobody was entitled to receive the monetary incentives (up to $2,000 per referred individual) associated with the walk-in enlistments. The walk-in names and SSNs were provided by “active duty and civilian contract recruiters.” The information was used to claim referral credit and the incentives, which would then be split with those who provided the information.
The DOJ reported—
In total, Castro, Gonzales and their co-conspirators received at least $244,000 in fraudulent recruiting referral bonuses according to court documents. Castro personally received $26,000 in fraudulent recruiting referral bonuses using RA accounts in his name and an RA account in his relative’s name. In his capacity as a civilian contract recruiter, Castro admitted that he also sold the names and Social Security numbers of potential soldiers to a co-conspirator, in return for a portion of the fraudulent recruiting referral bonuses obtained by Aves and others. Gonzales personally received $17,000 in fraudulent recruiting referral bonuses using his RA account and permitted a co-conspirator to receive an additional $18,000 in fraudulent recruiting referral bonuses through Gonzales’s RA account.
For their crimes, the DOJ reported—
On June 29, 2012, Chief U.S. District Judge Fred Biery sentenced Christopher Castro to one year and a day in prison, to be followed by three years supervised release. Ernest Gonzales was sentenced on June 29, 2012, by Chief Judge Biery to five years probation. Chief Judge Biery also ordered Castro and Gonzales to pay $244,000 in restitution, to be paid jointly and severally.
So, what do we think about this latest evidence of corrupt behavior in our nation’s armed forces?
Well, what we think is that the Army should have done what almost every savvy corporation does, when recruiting referral bonuses are being offered. It should have made the new recruit identify any individual who made the referral, or else check a box on a form that said “nobody referred me.” That would have been a simple, inexpensive, effective control that would have acted to make this kind of “wide-ranging” conspiracy a whole lot harder to execute.
That’s what we think about that.
Paying Small Business Subcontractors More Quickly
Nick Sanders
The best companies focus on managing cash flow. They work hard on making sure they generate accurate and “adequate” invoices to their government paying office. They work hard on making sure that the cognizant Contracting Officer has updated the payment system to have funds available to pay the invoices. They work hard to stretch out payment terms to subcontractors and suppliers. The goal is simple: get the money in the door (from customers) before the money goes out the door (to suppliers). To the extent they are successful in accomplishing that goal, the need to borrow money (and to pay unallowable interest on loans) is minimized.
We hope you are one of those companies who focuses on cash flow. But if you are one of those companies, then you need to be aware of a recent Memo from the Office of Management and Budget (OMB) that impacts your cash management activities.
On July 11, 2012, the OMB issued a Memo entitled, “Providing Prompt Payment to Small Business Subcontractors.” The July 11 Memo followed-up on a similar September 14, 2011 Memo, that established as policy the objective that, “to the full extent permitted by law, agencies shall make their payments to small business contractors as soon as practicable, with the goal of making payments within 15 days of receipt of relevant documents.” (“Relevant documents” include a proper invoice and receiving documents indicating acceptances of goods/services.)
The July 11 Memo addresses paying Prime Contractors more quickly, so as to enable them to pay their small business subcontractors more quickly. The Memo states, “agencies should, to the full extent permitted by law, temporarily accelerate payments to all prime contractors, in order to allow them to provide prompt payments to small business subcontractors.”
The “temporary” goal established by the Memo is 15 days. In other words, Executive Branch agencies should pay their Prime Contractors within 15 days, so that the Primes can pay their small business subcontractors within 15 days.
That’s the good news.
The Memo also directs agencies to “encourage” Prime Contractors to—
… consider modifying their existing contracts with small business subcontractors without consideration or fees to include a clause providing that the prime contractor will pay the small business subcontractor along an accelerated timetable to the maximum extent practicable; and insert a similar clause in their future contracts with small businesses subcontractors.
The foregoing would mean significant work on the part of the Primes. It might also impact the “accepted” way that cash flow has been managed for many years. In particular, it puts in peril the disreputable “pay when paid” contract term that leads to subcontractors financing the Prime Contractors’ cash flow.
The OMB Memo also requests that the FAR Councils create a new contract clause to be inserted into future contracts, so that the accelerated subcontractor payments will be required by regulation (and contract), and Prime Contractors will have more than “encouragement” in order to make accelerated payments.
Naturally, some Prime Contractors will game this. They will accept the accelerated payments from their customers but delay payments to their subcontractors. That’s probably not going to lead to happy past performance ratings.
The OMB had this to say about their appeal to the honor of the Primes—
The acceleration of payments to all prime contractors is a one year, temporary, transitional policy that provides for immediate assistance to small businesses, while affording agencies and prime contractors time to insert contract clauses as described above, or take other appropriate steps, to ensure that prime contractors provide prompt payment to their small business subcontractors. On a date one year after the date of this memorandum, the policy of automatically accelerating all payments to prime contractors shall terminate. … OMB will then provide further guidance on the appropriate steps that agencies should consider to ensure that small business subcontractors continue to be paid promptly by their prime contractors. Such steps may include continuing to provide accelerated payment to prime contractors that have inserted contract clauses as described above, exercising flexibility that is being considered as part of the implementing regulations of the Small Business Jobs Act that enables agency contracting officers to consider a prime contractor's commitment to paying small business subcontractors in a prompt manner as part of a contract award determination, or other measures as OMB deems appropriate.
If you read the foregoing paragraph, you will see at least one carrot and at least one stick. We think you ought to consider what you will do over the next year with the accelerated payments you will be receiving. The wrong step might lead to problems.
One more thing we noticed in the OMB Memo.
The term “subcontractor” is difficult to define. Or, rather, it has many definitions sprinkled throughout the FAR, the DFARS, and the various solicitation provisions and contract clauses. For purposes of complying with the Memo, the OMB has defined “subcontractor” as the term is used in FAR Part 3.5. I.e., a subcontractor "(1) means any person, other than the prime contractor, who offers to furnish or furnishes any supplies, materials, equipment, or services of any kind under a prime contract or a subcontract entered into in connection with such prime contract; and (2) includes any person who offers to furnish or furnishes general supplies to the prime contractor or a higher tier subcontractor."
So by “small business subcontractor,” the OMB means any supplier or vendor your business may use. Remember that definition when you contemplate how your company is going to comply with this new emphasis on paying small business subcontractors faster.
Plan to Reduce Employee Travel Costs
Nick Sanders
Hey! In case you’ve not been following the news, you may not be aware that both Congress and the Executive Branch Departments and agencies agree on something! They both agree that Executive Branch Departments and agencies spend too much taxpayer funds on travel-related costs.
It all started with the GSA “conference” spending spree, and then in May 2012, the Office of Management and Budget issued a Memorandum called “Promoting Efficient Spending to Support Agency Operations.” The OMB Memo required that, in Government Fiscal Year (GFY) 2013, each agency must spend 30 percent less on travel expenses then it did in GFY 2010. The travel expense reductions must continue through GFY 2016. The Memo stated—
In addition, agencies shall include in their FY 2014 budget submission to OMB a description of how they will make these travel reductions sustainable, including the specific process changes and technology investments necessary to reduce their reliance on travel.
The Memo also stated—
In addition, to assist agencies in achieving these reductions in travel expenses, no later than 180 days from the date of this memorandum, the Department of Defense and the General Services Administration (GSA), in consultation with OMB, shall review the Joint Federal Travel Regulations and the Federal Travel Regulation (FTR) to ensure that the policies reduce travel costs without impairing the effective accomplishment of agency missions.
Suggested policy changes included:
Have employees share vehicles
Ensure per diem payments are reduced when a third party provides meals
Ensure that employees capture lower airfares by “appropriately timing the purchase of airfare”
Ensure that refunds for unused or partially used airline tickets are collected
Next, Deputy Defense Secretary Ashton Carter issued his own Memo, directing the DOD Comptroller “to reduce spending on travel, conferences, and other agency operations,” according to this story. The directed spending reductions align exactly with those called-for by the OMB Memo.
Finally, Federal Times reported that the GSA is “considering” lowering existing per diem rates by up to 30 percent. The Federal Times story said, “GSA recently discussed with travel industry officials the possibility that it will revise how it calculates average per diems by removing more costly hotels from its averages — lowering the resulting per diem.” The story quotes a knowledgeable person as stating that, if the cuts go into effect, then about 85 percent of hotels in Washington, D.C., would exceed the lodging limits within the per diem rates. The story quoted the spokesperson as follows—
McBurney said Marriott and Sheraton would be among hotel chains most affected. Feds could be priced out of many hotels in more expensive markets, such as New York, San Francisco, Chicago and Baltimore, in addition to Washington, he said.
This story contained a call for action by the hotel industry, to try to stop GSA’s per diem cuts. We were interested in the mechanics of the GSA lodging rate-setting process found in the story. It said—
Currently, GSA solicits room rate data and then determines hotel average daily rates (ADR) by including rates from hotels in the ‘mid-price range.’ Those rates are gathered from independent, midscale, upscale, upper upscale properties. GSA omits rates from economy and luxury hotels from the data as it considers them outside the mid-price range (too low and too high, respectively). After determining ADR for locations throughout the US, GSA then reduces those rates by 5 percent and establishes per diem rates at that discounted level.
Under the proposed new system, GSA may include only lower hotel rates in the mid-price range when calculating ADR. If GSA does so, it will be intentionally reducing room rates rather than reflecting average room rates, according to the American Hotel & Lodging Association.
This story at Hotel News Now reported that “In a presentation to members of the hotel industry prepared by the GSA, an example of the new methodology showed the federal standard per-diem rate decreasing from $136 to $107.”
So what does this all mean?
Well, you should know that the GSA per diem limits (lodging plus meals/incidentals) are also, generally, the limits on the amount of allowable travel costs that you can bid and bill to your Federal customers. (See the Travel Cost Principle at FAR 31.205-46.) Thus, if GSA does cut its per diem reimbursement rates, the amount of your allowable per diem will be reduced as well. If you do nothing, the additional unallowable travel costs will come out of your profit dollars.
So you should do something. Now. Be proactive for once, will you?
It’s time to reexamine and reevaluate your existing travel policies in light of the (probable) per diem reductions. Take a look at the bulleted points from OMB and consider weaving those strategies into your travel policies and procedures. Consider specifying less “swanky” hotels—i.e., moving away from Westin, Sheraton and Marriott, and toward Holiday Inn and the like. Put pressure on your preferred hotel partners to give you rates commensurate with what they offer GSA, and make sure your rates scale down if GSA gets lower rates.
We don’t agree that GSA’s methodology results in fair lodging rates, but that’s not our call to make. The fact is, if GSA lowers the lodging limits, you need to be ready—unless you are willing to see your unallowable travel costs increase by a relatively significant amount.
Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.
