Business System Deficiencies Continue to Distract Lockheed Martin
Poor LockMart. It’s almost like the company’s Fort Worth, Texas, plant is cursed or something.
It’s not enough that the company has been in a prolonged strike with about 3,600 employees who are members of Machinists’ Union. It’s not enough that DoD is playing protracted games with its analysis of how much the next production order of F-35 Joint Strike Fighters “should cost.” It’s not enough that the plant’s largest program is suffering from operational challenges and delayed/withdrawn orders from its customers. Nope, those aren’t enough pain points for the largest defense contractor. No sirree.
Now, to add on to the contractor’s pile of pain, DCMA has decided to increase the amount of payment withholds on the F-35 program, from 2 percent to 5 percent. As we have previously reported to our readers, the Pentagon has had long-standing concerns about LockMart’s implementation of its Earned Value Management System (EVMS) at the Fort Worth plant. Let’s be clear: this has been an on-going problem for LockMart since 2007. In October, 2010, DCMA found that LockMart had made inadequate progress on its corrective action plan and “decertified” the Fort Worth EVMS. (We think “withdrew approval” or “found to be inadequate” would be more accurate descriptors, but we can only quote our sources.) DCMA was quoted as stating that the “decertification” would “help ensure that Lockheed Martin devotes the needed attention to complete the corrective action plan in a timely manner. It also reinforces the responsibility the company has to deliver to the government what it agreed to.”
But that strategy didn’t lead to the results that DCMA wanted, and in March, 2012, payment withholds of 2 percent were implemented (as authorized by the new DFARS “business system” clause that was included in LockMart’s latest F-35 contract award.) Now, a bare three months later, the payment withhold has been increased to the maximum amount of 5 percent. What happened during those three months?
As Aviation Week & Space Technology reported (link above)—
Between January and May, officials from DCMA, the Defense Contract Audit Agency and the F-35 joint program office visited Lockheed Martin’s Fort Worth facility to check on Lockheed’s plan to fix the cost-tracking system, not just for the F-35 but also for the F-22 and the F-16. And while DCMA noted that Lockheed has made progress, ‘EVMS implementation for F-35 System Development and Demonstration and production contracts remains a major concern,’ according to a Pentagon summary statement.
The corrections were expected to be complete by June, but the DCMA suspended the review because it was unlikely that the problems could be corrected by the deadline.
Bloomberg Business week reported some more details on LockMart’s EVMS problems. It said—
The review that began in March had been delayed by a year ‘to allow sufficient time for Lockheed to fully execute’ the [corrective action] plan, the agency said. Lockheed, the world’s largest defense contractor, said it was 99 percent finished implementing improvements before the review began, according to the contract agency.
Even so, the agency said in its letter that it found recurring concerns about ‘data ‘discrepancies.’
Among the deficiencies were ‘poor quality,’ unreliable estimates about how much contracts will cost on completion, ‘inadequate recording’ of direct costs and ‘data inconsistencies,’ according to the letter.
Okay, we have two thoughts about LockMart’s latest payment predicament.
First, we are concerned about the use of the term “discrepancy” when the DFARS clause clearly uses the phrase “significant deficiency.” We don’t want to be nitpickingly pedantic, but not all discrepancies are system deficiencies, and not all system deficiencies are “significant”. This is important stuff. Cash flow is involved. We need DCMA and its functional specialists to adhere to the letter of the law here, and not play petty power games that seem suspiciously timed to impact LockMart during protracted and potentially contentious price negotiations. The language used indicates that somebody doesn’t understand how the business system clause(s) are to be implemented; the government may be leaving itself vulnerable to a successful LockMart claim.
On the other hand, we would be concerned—very concerned—if a government official told our client that it was having difficulties recording direct costs. Proper recording of direct costs (such as labor, materials, subcontractor billings, and travel) is the blocking and tackling of government contract cost accounting, and LockMart should be have that down pat, as should all serious government contractors. We don’t have any details regarding the (alleged) issue, but it may hint that the government has an ace up its sleeve with respect to LockMart—a hidden trump card that it can play if the company chooses to pick a fight in court.
Second, we remain unconvinced that LockMart is receiving fair treatment by the Pentagon. We noted the suspicious timing of the cash flow hit, and we noted the improper use of the term “discrepancy” instead of the correct phrase “significant deficiency”. In addition (as we told readers in a previous article on this subject), there is a question in our minds as to whether DCMA’s EVMS functional specialists were being independent and objective in the performance of their reviews of LockMart’s EVMS. We noted a GAO review of 14 Missile Defense Agency programs where seven of the programs were being performed by contractors whose EVM systems had been assessed by DCMA as being “noncompliant.” Despite the inadequate EVM systems, GAO reported that, “We reviewed the basis for the noncompliance and unassessed ratings and determined that [the EVM data was reliable enough] “for our purposes.”
GAO reported problematic EVM assessments by DCMA. It said—
For example, the EVM system of the STSS contractor Northrop Grumman was deemed noncompliant because of two low-level corrective action requests related to issues with other contracts that did not materially affect the performance baseline for the STSS contract we assessed. Also, the C2BMC’s contractor Lockheed Martin Information Systems & Global Services received a rating of noncompliant during 2009 because of a corrective action request that stated that major subcontractor efforts were not specifically identified, assigned, or tracked in the organizational breakdown structure. However, after the noncompliant rating was given, DCMA reversed its decision and decided to close the corrective action without requiring the contractor to change its methods.
That approach to evaluating a contractor’s EVM system seems problematic to us. When we think that the same reviewers might be the ones evaluating LockMart’s EVM system—and recommending payment withholds based on “discrepancies”—it makes our blood pressure shoot up a bit.
We also noted an article published in National Defense Magazine in which DCMA’s EVMS competencies were questioned. We quoted the article as follows—
‘There is enough blame to go around in industry and government,’ said one industry source. … Contractors for years have complained to the Defense Department that the government’s in-house EVMS skills base has degraded. Over the past several decades, the popularity of EVMS has ebbed and flowed, and so has the level of top management attention it has received both in the public and private sectors, experts said. The Defense Department’s newly created ‘PARCA’ office (Performance Assessments and Root Cause Analyses) within the office of the undersecretary of defense for acquisition is supposed to have an EVMS ‘policy czar’ on the staff, but that position remains unfilled. … The ‘executive agent’ in charge of overseeing EVMS since 1996 has been the Defense Contract Management Agency. Several senior jobs in that shop also remain vacant, sources said. … Well planned out, EVMS tells you ‘where your problems are going to be. … But if you let the skills deteriorate, you get surprises.’
We also reported to our readers GAO’s concerns with a deterioration of skill sets at DCMA. We quoted from the GAO report as follows—
Loss of this skill set, according to DCMA, meant that many of its pricing-related contract administration responsibilities, such as negotiating forward pricing rate agreements and establishing final indirect cost rates and billing rates, were no longer performed to the same level of discipline and consistency as in prior years. As a result, DCMA reported that DOD’s acquisitions were subjected to unacceptable levels of cost risks.
So what does all this mean? In our view, it means that DCMA needs to work very hard to show taxpayers that LockMart’s EVM system does, in fact, have significant deficiencies that compel it to implement payment withholds in order to protect taxpayer funds. It means that DCMA needs to be more transparent in its administration of the new DFARS business system clause(s) and ensure that the public knows it is acting reasonably and not capriciously—or to gain leverage in negotiations.
In the meantime, Lockheed Martin needs to evaluate why it cannot, after five freaking years, satisfy its DCMA reviewers. It the company doing something wrong? Or has DCMA set the bar so high that the company will never, ever, meet it? If the latter is the case, then is the company willing to take the matter to court?
Readers, Lockheed Martin is first in line. But the line of contractors who will feel the pain of the DFARS business system clauses will be very long. You need to watch what LockMart does very closely, and tailor your strategy accordingly.
Lockheed Martin, we feel your pain.
Coast Guard Learns About Segregation of Duties
Segregation of duties is low-hanging fruit. It’s blocking and tackling. It’s fundamental and, for an entity of more than a couple of people, it’s easy to implement. One would think that the United States Coast Guard would have figured out the concept long ago. One would be wrong.
The concept of “segregation of duties” is basically having more than one person involved in a complete task. Wikipedia explains, “Companies in all sizes understand not to combine roles such as receiving checks (payment on account) and approving write-offs, depositing cash and reconciling bank statements, approving time cards and have custody of pay checks, etc.” In the procurement realm, it is axiomatic that the person who selects suppliers and/or monitors technical performance should not also approve supplier payments. Having the same person involved in all aspects of supplier management violates the principle of segregation of duties and invites fraud and abuse.
Surprisingly, the Norfolk, Virginia, Coast Guard station failed to implement appropriate segregation of duties. Unsurprisingly, a Coast Guard Officer took advantage of the control failure and tried to pocket some cash. Happily, she was caught, charged, convicted and sentenced to prison.
Would you like to know more?
According to this Department of Justice press release, Coast Guard Lieutenant Danielle Ferreira (age 36) was responsible for “recommending contractors for maintenance and repairs onboard Coast Guard cutters … and overseeing those repairs to their completion.” One supplier that Lt. Ferreira recommended for ship repairs was Strategy One, LLC—a “small corporation in Connecticut that had no expertise in ship repairs.” No problem! Lt. Ferreira “recommended Wallace Haggins, an active duty Coast Guard recruiter, to assist [Strategy One] in obtaining workers to fulfill the repair contracts. Ferreira also recruited former Coast Guard members to complete the ship repairs awarded.” That was very nice of Lt. Ferreira to assist Strategy One with performance of its contractual duties. Very nice, but perhaps a bit puzzling. Normally, government personnel do not take such a close interest in contractor activities.
That close interest might be explained by the fact that Strategy One was owned by Ferreira’s cousin, Tracia Christian-Young. The DOJ press release reported that—
Once the ship repairs were completed and the U.S. Treasury paid Strategy One, Christian-Young and Haggins deposited approximately $83,000 into two business accounts owned by Ferreira and her spouse, Henry Ferreira. These two business accounts bore the names Black Kai Boxing Academy and TEDD Electric, and therefore had no apparent relation to Ferreira and her spouse.
That’s not all. The DOJ also reported that—
Ferreira also obtained $15,000 from another Coast Guard contractor by adding $15,000 to the contractor’s final payment. Ferreira told the contractor that a subcontractor on another of her Coast Guard contracts had not been paid, and the additional $15,000 was to pay that sub-contractor. Ferreira asked the contractor to make the $15,000 check payable to TEDD Electric, which was the name of her spouse’s company and bank account. In total, Lieutenant Ferreira and her co-defendants fraudulently obtained approximately $150,000 in less than six months.
You know, Lt. Ferreira wasn’t dumb. Those were fairly sophisticated schemes. We would love to know how she was caught. Perhaps it was the second, unnamed subcontractor, who became suspicious when Ferreira told it to make a check out to an unknown company and invoice it as if the company was a lower-tier subcontractor. Hopefully, such a request would ring the alarm bells at any reputable Federal contractor.
Regardless, it seems that Lt. Ferreira had too much authority and not enough supervision. She should not have been performing so many parts of the supplier selection, management, and payment approval process. We hope the Coast Guard learned its lesson.
You might want to consider if there are any lessons here for you to learn, as well.
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Technology Birthday
We here at Apogee Consulting, Inc. would like to wish Happy Birthday to Mark Sewall, our Technologist, Web Master, and publisher of more than 500 individual blog articles on this site.
Mark’s birthday is June 28. He was born in 1966, making him 46 years old.
He was born in South Pasadena, California. That’s where he’s lived his life, except for a brief stint in Northern Virginia. As a South Pas native, he’s been exposed to the “old money” influences of the city and its surrounding environs. This has given him a certain panache and élan that, quite honestly, we envy.
Other notable folks who are linked with Mark’s birthplace include:
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Alison Brie, who can be seen on the TV shows Mad Men and Community
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David Lee Roth, one-time lead singer of the rock band Van Halen
Mark has spent years developing his eclectic skill set, which he employs to great advantage for Apogee Consulting, Inc. We wish him many more years of learning!
Happy Birthday, Mr. Sewall.
What the F-35 Should Cost Remains to be Seen
Not so long ago, we predicted that the phrase, “should-cost” would become DOD’s FY 2012 buzz-word of choice. As we reported, in DOD’s new mindset, a program’s “should-cost” is based on the identified set of cost reduction opportunities that exists below the government’s “independent cost estimate” and which will become the basis for the government’s negotiating position.
More recently, we reported that the CEO of Lockheed Martin publicly complained that DOD’s “should-cost” initiative hindered its ability to cut overhead costs, because it “meant the company needed more people to generate thousands of pages of additional paperwork.” According to the article we quoted, Mr. Stevens said—
The Pentagon's focus on what weapons programs ‘should cost’ - as opposed to estimates focused on what they ‘would cost’ - had resulted in increasing requests for more certified cost and pricing data. Lockheed submitted 6,000 pages of data with its initial F-35 proposal, but had been required to generate an additional 7,000 pages of data for the negotiations in recent months, [Stevens] said.
Not having heard much about “should-cost” in recent weeks, we wondered how the initiative was working out for DOD. Well, as if to answer our questions, we saw this article at Defense News. It continues Mr. Stevens’ discussion of “should-cost” and notes some interesting tactics the Pentagon seems to be planning to deploy in its negotiations with LockMart over the pricing of the next tranche of F-35 JSFs.
The article reports that, even though negotiations “began earlier this year,” LockMart has “yet to be told what the Pentagon believes the upcoming production lot should cost.” The DOD negotiators will be keeping that figure a secret. The article quotes Shay Assad as follows—
Assad said that during the contract talks, Pentagon officials will share with Lockheed elements of the department’s should-cost calculation — namely, areas where savings are expected. But the department will not share its internal should-cost figures, he said.
Lockheed’s CFO (Bruce Tanner) stated that the company does not know if its proposed price will meet the price point that the Pentagon is seeking—because the Pentagon won’t tell the company its negotiating position. The Defense News article reported—
And while DoD has said it would also find ways to improve its processes and create savings, Lockheed has not seen that effort, Tanner said. Instead, the department seems to have based its should-cost estimate on what the program would cost if everything was working under optimal conditions, which could be risky, he said.
‘It serves no purpose to either side to negotiate to a level you can’t perform and then overrun to a level that you expected when you began the contract, and call that overrun,’ Tanner said. ‘It’s frustrating to both sides.’
The article further reports that some “acquisition experts” are skeptical regarding the “should-cost” initiative. It stated—
‘It’s an interesting way to try to impose discipline on what has become an undisciplined process. But I don’t think it gets at the core problem here,’ said Todd Harrison, senior fellow at the Center for Strategic and Budgetary Assessments. The major cost driver on weapon programs is requirements that are added over time with little regard for costs, Harrison said. ‘Until they get that process under control — and [until] they develop a rational way to understand the cost they’re imposing on the system with every additional requirement they put on it — I don’t think they’re going to be successful,’ he said. …
Should-cost estimates would be more useful as DoD decides which weapon systems to buy, Harrison said. Defense officials could compare their should-cost estimates to the proposals they receive from contractors to see if it’s worth pursuing, he said. But when programs are already in production, the should-cost is more like a ‘wish-it-would-cost,’ Harrison said.
Assad said the Pentagon has developed ways to measure any savings the should-cost initiative yields. ‘We have specific targets for program execution, very specific targets for the size of a program office or other areas that program managers will have defined,’ Assad said. ‘So we can measure that, we can examine that and we can know at the program level whether or not we accomplished it.’
Well, we here at Apogee Consulting, Inc. think it’s nice that Mr. Assad and his Pricing Directorate have very specific “should-cost” targets that they are aiming for. We just think it would be a whole lot easier to hit those targets if they would be shared with the contractor. You know: the entity that is actually designing and building the plane.
We understand that the government has little appetite for sharing its negotiating position with the contractor’s guy/gal across the table. But the fact is, unless the Pentagon treats this new “should-cost” initiative in a different manner from the way it has treated past initiatives (e.g., CAIV), it will carry little weight and ultimately amount to nothing.
To be clear: it likely does not matter to LockMart how DOD negotiators generated their negotiating position. We suspect it doesn’t matter whether the government’s negotiating position was generated via sophisticated computer models using terabytes of data or via the reading of tea leaves under a full moon at midnight. The point is that LockMart has its negotiating position, based on its analysis of what the planes will likely cost (including use of certified cost or pricing data) while the government has its negotiating position (however generated). Negotiations are what happen after that point.
That’s the way it is and that’s the way it has been for decades. The “should-cost” initiative was supposed to change that paradigm. But if DOD is treating “should-cost” as if it were the government’s independent cost estimate or any other pre-negotiation analysis, then the initiative has changed nothing.
If the entire “should-cost” initiative boils down to a new analytical process to derive the government’s negotiating position—if that’s all it is—then the initiative is wasting quite a bit of time and effort, on both sides of the negotiating table. It has to be more, else it’s in essence nothing at all. We sincerely hope it is much more than a new Pentagon approach to contractor negotiations.
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