DCAA Implements Major Changes to Incurred Cost Audit Program
On May 2, 2012, the Defense Contract Audit Agency issued MRD 12-PPD-014(R), announcing that the audit agency had eliminated the standard audit program for auditing the “incurred costs” of “non-major” contractors. Instead of having two audit programs—one focused on the larger “major” contractors and the other focused on the smaller, less risky, “non-major” contractors—the audit agency will henceforth have only one audit program for performing “incurred cost” audits.
The agency offered no substantive explanation for the change, reporting only that—
As part of Policy’s ongoing assessment of current audit programs supported by the Strategic Plan Ad Hoc on Incurred Cost, an in-depth review of the major and non-major incurred cost audit programs was performed. Based on this assessment, a decision was made to eliminate the non-major incurred cost audit program.
As readers know, we (and others) have opined that DCAA’s policy choices regarding GAGAS compliance and audit prioritization (as well as other choices we could list) have led the audit agency to an untenable place where its backlog of unperformed/uncompleted audits is too large to reduce in any meaningful way. A recent Federal Times editorial suggested that the Contract Disputes Act’s Statute of Limitations would soon render much of the backlog unauditable. That’s not necessarily true, but it’s very possible that the CDA SoL would make any Government action to collect money (allegedly) owed from DCAA audit findings unenforceable in court, should a contractor choose to contest them. So there would be little point to performing the audits.
Some might suggest that DCAA is undertaking this significant reform in order to speed the audits. We don’t know. We did notice that the MRD emphasized (for the first time in recent memory) the use of auditor “professional judgment” in order to “tailor the audit program to efficiently and effectively accomplish the audit objectives.” In fact, the MRD states—
In tailoring the audit program steps, the auditor, in consultation with his or her supervisor, should apply professional judgment, considering the significance of the claimed amounts and known risk factors. Auditors are reminded that the standard audit program provides the overall framework for performing the audit in compliance with GAGAS and it is expected that the program will be tailored for the specific contract audit based on the risk assessment.
So now there is one approach to performing “incurred cost” audits, and it is based on every contractor being as risky as the larger contractors. The funny thing is, DCAA did not extend the logic into other areas. For example, the 10310 audit program, entitled “Audit Program for Non-Major Contractors Labor Floorchecks,” still maintains the distinction between major and non-major contractors. Hmmm….
We have seen it suggested, by self-identified current and former DCAA employees, that the agency intends to reduce its enormous backlog by “risking-away” the smaller dollar value audits. As we told you, one commenter wrote—
Concerning the incurred cost workload, the plan for getting current is to sample the submissions that are less than $250M. Those that are less than $1M will likely never be audited because HQ views those audits as cost losers, which is no wonder given the amount of prepatory work (the risk assessment, increased transaction testing, and the greater number of reviews) now required. HQ is talking about more and more sampling (leaving more submissions completely unaudited), which will certainly incentivize some contractors to push the envelope when it comes to questioned costs. …
Another commenter asserted—
… DCAA wants to waive all possible incurred cost audits under $1 million too. And the metrics will show that we actually completed these audits. Waiving 1 low dollar incurred cost = completing 1 (only in DCAA does 0 = 1). Then there's our audit guidance - all of our audit guidance is being written for the largest contractors. Does our upper management get the risks at the nonmajors especially at a time when there is less spending and companies are going out of business or being bought out? … We can get plenty of these audits done if we had the prior audit programs that were geared towards non-major contractors. The new B2 is overkill and redundant. It's confusing. It's too much for a small contractor where an audit is performed by 1 person. Who really understands it? It's not user-friendly for auditors. Then it appears HQs wants to staff up the largest contractors with more people because that's the only places where risk exists to them. …
Well, we certainly don’t know what’s in the minds of DCAA leadership. Quite possibly the intention is to re-emphasize auditor judgment—a move that we would heartily endorse. Or perhaps, as the commenters quoted above implied, there is an ulterior motive behind the elimination of the “non-major” contractor category with respect to incurred cost audits. Again, we do not know.
But we know that the smaller, formerly “non-major” contractors should prepare themselves for a rough ride.
Has USAF (Re)Learned How to Evaluate Proposals?
Readers know that we’ve taken the US Air Force to task—more than once—for botched source evaluation and award decisions. The debacle of the KC-X aerial tanker competition was not the only screw-up. More recently, legal maneuvering with regard to the Light Air Support (LAS) competition, evaluation, and award to the team of Sierra Nevada Corporation (SNC) and Embraer has generated several articles on this site—the most recent here.
The LAS story involves a USAF award decision that was “inadequately documented,” a refusal to provide the losing bidder with a debrief (because of an untimely request), a denied protest at GAO, litigation at the Court of Federal Claims, a “Commander Directed Investigation” into the source selection decision, an early termination of the inadequately documented contract award, and a decision to recompete the matter. As we reported, the USAF decided not to conduct a fly-off in the recompete, a decision that Under Secretary for Defense (AT&L) Kendall termed “acquisition malpractice” when it was made with respect to the F-35 JSF program.
It is that decision not to perform flight tests that sparked SNC to file an action of its own at the Court of Federal Claims, seeking to have its terminated contract reinstated. The various stories on SNC’s action all of appear to be strangely similar in wording, almost as if they were all recapping the same SNC press release. Here’s a quote from the story linked-to above—
According to SNC the cancellation of the contract was an extreme response to what appears to be paperwork errors on the part of the USAF. Moreover, the revised Request for Proposal (RFP) issued by the USAF is tilted in favor of the competition. … SNC’s filing also raises specific concerns with the source selection process and revisions to Amendment 8 of the RFP. The new source selection process eliminates any flight demonstration/evaluation and moves the completion of First Article Test (FAT) of production aircraft out until delivery in July 2014. … The original source selection process included flight demonstrations of training and combat mission profiles and austere field operations. The competition sought non-developmental aircraft, which by definition should be available for evaluation.
Using language that was quite reminiscent of Hawker Beechcraft’s complaints regarding the original source selection decision, SNC Vice President Taco Gilbert was quoted as saying—
‘Despite repeated written and verbal attempts, we have not received adequate explanation – much less justification – for the termination of our contract, the reopening of the LAS competition or the readmission to the LAS competition of our competitor whose submission was previously found to be technically deficient and carry unacceptable mission capability risk.’
Gilbert added—
‘What we seek is a fair and open competition – one where there is a level playing field, one that provides transparency into the decision making process, and one that selects the best value as required by the Request for Proposal. Unfortunately, based on the information we have, we are concerned that this competition will not conform to these goals.’
But while the LAS debacle continues (depriving the warfighters in Southwest Asia with needed ISR capability), the USAF seems to have figured out how to evaluate complex proposals and make protest-proof source selection decisions in other areas. We are referring to the Dismount Detection Radar (DDR) contract award to Raytheon, a decision that was protested by the losing bidder (Northrop Grumman). Northrop’s protest was denied, and the lengthy GAO decision gives us enough details so that we think the USAF evaluators may have (re)learned how to do their job.
According to the GAO decision—
The DDR system is intended to provide a ground moving target indicator capability to detect and track vehicles and dismounts. The system, operating as a pod on the MQ-9 Block 5 Reaper, will allow combatant commanders and their forces to identify and eliminate threats before adversaries engage in harmful activities against the United States and Coalition Forces. … According to the agency, the DDR system is an urgent and compelling need of the warfighter.
The Air Force sought bids from only two companies, Raytheon and Northrop. The decision to limit competition was properly justified, according to the GAO. RFP evaluation factors were clearly articulated, as follows—
Award was to be made to the offeror whose proposal represented the best value to the government based on an integrated assessment of three evaluation factors: (1) schedule; (2) technical capability (comprised of two subfactors, technical performance, and engineering and management integrated processes--technical performance was considered more important); and (3) cost/price. … The schedule factor was more important than the technical capability factor; when combined, these factors were approximately equal to the cost/price factor. Each offeror’s technical solution would be assessed both technical and risk ratings for the schedule factor and for each technical capability subfactor. … For the technical ratings, the Air Force was to evaluate the quality of the technical solutions as outstanding, good, acceptable, and so on. In assessing the risk associated with each approach, which was to be evaluated as low, moderate, or high, the Air Force was to consider such things as the potential for disruption of schedule and the need for increased government oversight.
The bidders submitted proposals and made an oral presentation. The Source Selection Evaluation Team (SSET) made an initial evaluation and briefed the Source Selection Authority (SSA). Written and oral discussions were held with both bidders, and both bidders submitted final proposal revisions in response to those discussions. The final proposal revisions were evaluated by the Source Selection Evaluation Board (SSEB), briefed the Source Selection Advisory Council (SSAC) on its findings, and prepared a Proposal Analysis Report (PAR). The SSAC prepared a Comparative Analysis Report (CAR) and briefed the SSA on its award recommendation. The GAO decision stated—
In making his source selection decision, the SSA conducted an integrated assessment and found that Raytheon’s proposal presented a lower evaluated cost, less risk in the schedule factor, and a higher performing and more capable DDR system in the technical performance factor. He considered Raytheon’s proposal to be the best value for the government.
The GAO decision also reported that—
… the SSA first found that Raytheon had the stronger proposal under the schedule factor based on differences in the maturity of the offerors’ antenna array design/built/test efforts. … Second, under the technical performance subfactor, the SSA explained that Raytheon’s one weakness was based on its proposal of [DELETED] flight tests, an insufficient number. The SSA concurred with the technical team’s conclusion that four additional flight tests would be required; given Raytheon’s approach, [DELETED] flight tests would be adequate. Raytheon’s GEMPC [Government Estimate of Most Probable Cost] was adjusted upward to account for the additional flight tests. Overall, the SSA concluded that Raytheon’s proposal, and its combined performance in the areas of radar performance, non-developmental items reuse, scalability and upgradeability, and information assurance, offered significantly more benefit to the government than did Northrop Grumman’s proposal…. Although Northrop Grumman distinguished itself in certain areas, it was not enough to overcome Raytheon’s overall superior DDR system performance and capabilities. … The SSA also noted that Raytheon’s proposal had the lowest evaluated cost.
We won’t go into all the issues raised by Northrop. We’ll simply summarize the issues as the GAO did. To wit—
Northrop Grumman primarily challenges numerous aspects of the Air Force’s evaluation of the proposals and alleges that they were disparately evaluated.
The evaluation of technical proposals is a matter within the agency’s discretion, since the agency is responsible for defining its needs and for identifying the best methods of accommodating those needs. … Our Office will not reevaluate technical proposals; rather, we will review a challenge to an agency’s evaluation only to determine whether it was reasonable and consistent with the terms of the solicitation and applicable statutes and regulations. … A protester's mere disagreement with the agency's judgment regarding the relative merits of competing proposals does not establish that the evaluation was unreasonable. … Our decision does not specifically address all of Northrop Grumman’s arguments, but we have fully considered each of them and conclude that they do not provide a basis to sustain the protests.
Readers unfamiliar with the intricacies of government source selection and evaluation requirements may be put-off by the number of acronyms and the obviously bureaucratic processes involved. (We could have described even more bureaucratic processes and used even more acronyms, had we wished. They are certainly present in the GAO protest decision.) But readers need to understand that such seemingly bureaucratic processes are designed to (1) provide documentation, (2) support transparency, (3) facilitate oversight (including judicial review, if necessary), and (4) provide assurance that taxpayer funds are being wisely spent.
Contrast the robust documentation trail in the DDR source evaluation and selection decision with the “inadequate” documentation trail in the LAS competition. In the former case, a protest was denied and the winner could get back to performing the contract. In the latter case, a contract was terminated, an investigation was launched, and the parties are flailing about in court. In the former case, the warfighters will get their technical support on time; in the latter case, they will not.
Which do you think is the better outcome?
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DOD Implements Limits on Prices Paid for Contracted Services
We have devoted several blog articles to the question as to whether or not the Federal government’s use of contracted (“outsourced”) services results in any cost savings. As we reported, opinions vary. The Project on Government Oversight (POGO) had an opinion; so did the Government Accountability Office (GAO); so did the Congressional Budget Office (CBO). Opinions varied and we suggested that our readers should look at the various studies and reach their own conclusions.
In the meantime, Congress has spoken. In a little-known section of the FY 2012 National Defense Authorization Act, Congress imposed “a temporary limitation” on the amount of funds available for contracted services by Department of Defense. The Public Law reads—
Except as provided in subsection (b), the total amount obligated by the Department of Defense for contract services in fiscal year 2012 or 2013 may not exceed the total amount requested for the Department for contract services in the budget of the President for fiscal year 2010 (as submitted to Congress …) adjusted for net transfers from funding for overseas contingency operations.
In addition, Congress directed the Secretary of Defense as follows—
Not later than 60 days after the date of the enactment of this Act, the Secretary shall issue guidance to the military departments and the Defense Agencies on implementation of this section during fiscal years 2012 and 2013. The guidance shall, at a minimum—
(1) establish a negotiation objective that labor rates and overhead rates in any contract or task order for contract services with an estimated value in excess of $10,000,000 awarded to a contractor in fiscal year 2012 or 2013 shall not exceed labor rates and overhead rates paid to the contractor for contract services in fiscal year 2010;
(2) require the Secretaries of the military departments and the heads of the Defense Agencies to approve in writing any contract or task order for contract services with an estimated value in excess of $10,000,000 awarded to a contractor in fiscal year 2012 or 2013 that provides for continuing services at an annual cost that exceeds the annual cost paid by the military department or Defense Agency concerned for the same or similar services in fiscal year 2010;
As contractors have been discovering this little landmine buried in the Public Law, they have become concerned that overzealous contracting officers might use the foregoing to limit any contractor increases to direct labor rates and/or to indirect cost rates. A careful reading of the language should clarify that the statute does not impose any such limits; instead, it requires that such limits be used to establish the government’s negotiation objectives.
That is not at all the same thing. The government may establish for itself any negotiation objective it wishes; that does not mean government negotiators will achieve those goals.
In order to comply with the statutory requirement, the DOD could not wait for the usual rule-making bodies to act. Instead, the Defense Procurement and Acquisition Policy (DPAP) Directorate issued a Class Deviation in June, 2012. The Class Deviation essentially reiterates the statutory language quoted above, and notes that the Class Deviation will “remain in effect until incorporated in the FAR or DFARS, or rescinded.”
The thing is, why would this ever need to be in the FAR or DFARS? The statute required that “guidance” be issued, and so it was issued. Nothing more need be done. In fact, we would assert that “guidance” doesn’t belong in the FAR or DFARS. If DPAP thinks it’s necessary to codify the guidance, then the proper place for it would be in the DOD PGI (Procedures, Guidance, and Information). That may sound like a bit of a nitpick (and perhaps it is). But the folks at DPAP are supposed to be the top regulatory policy and rule-makers at DOD, and they are not supposed to make mistakes like that. (If it wasn’t a mistake and they really do think that the proper place for “guidance” is in the FAR or DFARS, then Heaven help us all.)
One might wonder why Congress felt it was necessary to implement such funding controls over outsourced DOD services. According to the Senate Conference Report (helpfully provided at the WIFCON website)—
The efficiencies initiatives announced by the Secretary of Defense on August 9, 2010, included a 3-year, 10 percent per year reduction in support contractors performing `staff augmentation services' and a 3-year freeze on DOD civilian personnel. The committee notes that `staff augmentation services' has a subjective definition, and this category of contractors is not tracked in any of the Department's business systems. Moreover, many comparable functions are performed both by civilian employees of the Department and pursuant to contracts for services. Expected savings from the reduction in staff augmentation services and the civilian workforce freeze could easily be lost if other categories of services contracts are permitted to grow without limitation so that spending can shift to these contracts.
Over the last decade, DOD spending for contract services has more than doubled, from $72.0 billion in fiscal year 2000 to more than $150.0 billion (not including spending for overseas contingency operations), while the size of the Department's civilian employee workforce has remained essentially unchanged. The Under Secretary of Defense for Acquisition, Technology, and Logistics testified in September 2010:
`I just tell you, the low-hanging fruit really is [in contract services]. There's a lot of money. There has been a very, very high rate of growth over the last decade, in services. They have grown faster than everything else. . . . So, there's a lot we can do. … I think great savings can be had there, across the Services' spend. It's essential that we look there, because that's half the money.' …
The committee concludes that an across-the-board freeze on DOD spending for contract services comparable to the freeze that the Secretary of Defense has imposed on the civilian workforce is warranted to ensure that the Department maintains an appropriate balance between its civilian and contractor workforces and achieves expected savings from planned reductions to both workforces.
In other words, DOD promised to cut its support contractors as well as its civilian workforce as part of its “Better Buying Power Initiative.” Congress didn’t want those promised cost savings offset by increases in other areas of service contracting. Moreover, DOD officials testified that they could find lots of cost savings in that area; Congress was simply taking them at their words.
In other words, DOD did this to itself. Now they—and defense contractors—need to live with the results.
Want to Know How to Fix DCAA? Ask Everyone!
The current DCAA narrative is that the audit agency can focus on both quality and productivity, and catch back up to where it needs to be. Sarah Chacko recently wrote on Federal Times that DCAA has such a catch-up plan. She wrote—
DCAA officials say … DCAA has a plan to pick up speed and eliminate the backlog by October 2014. The agency will:
• Expand the auditing staff. It has already added 615 employees since 2008 and plans to add another 1,000 by 2015 to bring its auditor workforce to more than 5,000.
• Dedicate teams of auditors entirely to the backlog of incurred cost audits, which are audits of contracts that have already been paid.
• Conduct less stringent audits on low-risk contractors.
• Farm out some work to the Defense Contract Management Agency (DCMA). Specifically, it is asking DCMA to conduct more forward-pricing audits, which are audits performed on contractors' proposed prices and terms of service prior to the award of a contract. Doing this should free up more DCAA auditors to work on the backlog of incurred-cost audits.
But, as Ms. Chacko wrote, “Contract lawyers and former DCAA auditors say that won't be enough.”
Meanwhile, over at the POGO blog, self-identified current and former DCAA auditors continue to post comments regarding problems faced by the audit agency. We’ve quoted a few of those in a past article, but new posts keep coming. One of the new commenters, posting as “Bill Reed,” posted (perhaps with tongue in cheek?)—
I have copy/pasted several of the comments on this blog to the anonymous feedback page of the DCAA intranet site. Their silence has been deafening. So I assume that they think all this media buzz is not worth their attention. Fitzgerald told me personally that he could not manager an agency on the basis of blog comments. I'm note sure what the answer is, but I encourage all of you with an interest in this problem to continue commenting. I'm pretty sure the management elite is monitoring the POGO cimments. Maybe we can make a difference. Let's hear from you!!!
That comment got us thinking about the use of blog comments (anonymous or not) to guide organizational strategy.
At first glance it seems obvious that any organization’s leadership has to hold its course and thus cannot be swayed by anonymous blog comments—or even entire blog articles—that purport to point out problems and to proffer possible solutions. But then we thought—why not?
Why can’t Director Fitzgerald and his Senior Executives reach out to the rank-and-file auditors, or to academia, or to the contractors, or even to the public at large? Why can’t any organization’s leadership seek feedback and suggestions for course corrections from a wide group of opinion-holders? Why can’t it be done? What’s stopping it from happening?
We want to let you know that it’s already being done. Just not by DCAA or by DCMA or by any other DOD entity that we know of (with the possible exception of DARPA). It’s being done by companies in diverse industries in locations around the world.
Folks, it’s called “crowdsourcing.”
According to Wikipedia, crowdsourcing “is a process that involves outsourcing tasks to a distributed group of people.” The Wikipedia article continues—
In the classic use of the term, problems are broadcast to an unknown group of solvers in the form of an open call for solutions. Users—also known as the crowd—submit solutions. Solutions are then owned by the entity that broadcast the problem in the first place—the crowdsourcer. The contributor of the solution is, in some cases, compensated either monetarily, with prizes, or with recognition. In other cases, the only rewards may be kudos or intellectual satisfaction. Crowdsourcing may produce solutions from amateurs or volunteers working in their spare time, or from experts or small businesses which were unknown to the initiating organization.
Wondering whether the concept of crowdsourcing had ever been applied to management problems, we did a quick Google search and came up with this article at the Management Innovation EXchange (the MIX).
In an article entitled, “Should You Crowdsource Your Strategy?” MIX author Polly LaBarre wrote—
All too often, direction setting happens in an ivory tower—cut off from valuable in-the-trenches insight and expertise and out of tune with shifts in the broader environment. What’s more, when strategy is cooked up in an elite enclave, the process of ‘selling’ it to the very people expected to implement it becomes an arduous and uncertain chore.
Sounds like what we’ve been saying about Fort Belovoir for quite some time, doesn’t it? But there’s more.
Ms. LaBarre gives a positive review to an article at McKinsey Quarterly (registration required), and she even quoted from it. The article was called, “The Social Side of Strategy” and it discussed whether, and how, to crowdsource organizational strategy. It started as follows—
In 2009, Wikimedia launched a special wiki—one dedicated to the organization’s own strategy. Over the next two years, more than 1,000 volunteers generated some 900 proposals for the company’s future direction and then categorized, rationalized, and formed task forces to elaborate on them. The result was a coherent strategic plan detailing a set of beliefs, priorities, and related commitments that together engendered among participants a deep sense of dedication to Wikimedia’s future. Through the launch of several special projects and the continued work of self-organizing teams dedicated to specific proposals, the vision laid out in the strategic plan is now unfolding.
The article was rife with examples of how companies in diverse industries are experimenting with innovative ways of developing their organization’s strategy. It noted—
… executives at organizations that are experimenting with more participatory modes of strategy development cite two major benefits. One is improving the quality of strategy by pulling in diverse and detailed frontline perspectives that are typically overlooked but can make the resulting plans more insightful and actionable. The second is building enthusiasm and alignment behind a company’s strategic direction—a critical component of long-term organizational health, effective execution, and strong financial performance that is all too rare …
The article pointed out that making a break from the status quo requires a certain level of courage. It stated—
It takes courage to bring more people and ideas into strategic direction setting. Senior executives who launch such initiatives are essentially using their positional authority to distribute power. They’re also embracing the underlying principles—transparency, radical inclusion, egalitarianism, and peer review—of the Web-based social technologies that make it possible to open up direction setting.
Taking these principles to their logical conclusion suggests a shift in the strategic-leadership role of the CEO and other members of the C-suite: from ‘all-knowing decision makers,’ who are expected to know everything and tell others what to do, to ‘social architects,’ who spend a lot of time thinking about how to create the processes and incentives that unearth the best thinking and unleash the full potential of all who work at a company. Making this shift doesn’t imply an abdication of strategic leadership. The CEO and other top executives still have the right—indeed, the responsibility—to step in if things go awry, and of course they continue to be responsible for making the difficult trade-offs that are the essence of good strategy.
Doesn’t the above sound like how one might describe certain aspects of DCAA leaders? As others have pointed out, recent leadership position descriptions don’t require any in-depth knowledge of FAR or CAS. Instead, classic leadership “soft skills” have been emphasized. So why not keep going in that direction? Put in such a fashion, does it really seem like that large of a step to go from actively ignoring input to actively soliciting it?
The bottom-line is this: DOD and DCAA leadership have (allegedly) stated that they must ignore blog comments (such as those found at POGO) and steer their ship by the stars as they see them. That’s a great management philosophy from 30 or 40 years ago, but ignores the many benefits to be gained from a more participatory discussion of strategy and policy—one involving not only front-line auditors and audit supervisors, but also contractors, POGO, and other members of the public at large.
The thing is, we aren’t living in 1965: this is the twenty-first century. This is the golden age of information. This is the age of social networking. We have Facebook and LinkedIn and Plaxo and Twitter and Tumblr and Heaven knows what other social media to connect us to each other. We have Kickstarter and Survey Monkey and lots of other avenues that would let people with opinions connect with those who might benefit from those opinions. We already have the technology; it can be done, if the desire and will are there.
More fundamentally, what does DCAA leadership have to lose by opening the doors to the opinionated crowd? At worst, they create an opportunity for folks to vent and to let out their frustrations. At best, they might learn something new, something that sparks them to take action in a new direction.
Obviously, the only thing stopping DCAA (and DCMA) leadership from opening-up a participatory dialog with interested stakeholders is an unreasonably firm grasp on past management approaches and practices—and, perhaps, a fear of embracing twenty-first century networking modalities.
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