Follow-Up to Better Buying Power
One of the over-arching themes of the Pentagon’s strategy to cope with declining defense spending is called the “Better Buying Power” Initiative. It’s a wide-ranging attempt to rein-in the costs of weapon systems through five major attack vectors, including—
-
Focus on affordability during requirements planning
-
Incentivize contractor efficiency and productivity
-
Increase competition
-
Improve “tradecraft” on acquisition of services
-
Reduce non-productive processes and bureaucracy
We’ve posted a number of articles on the BBP, though it’s been awhile. A good exemplar of our reporting can be found right here.
In the past several months since the BPP Initiative was unveiled, the Pentagon bureaucracy civil service has been busy inculcating it into the culture of the acquisition workforce. Did you know that the Defense Acquisition University (DAU) has created a website devoted to the BBP Initiative? Here’s a link to that site.
Following the links at the DAU site, we found this nice resource: a series of BBP training modules. One of the training modules we reviewed was called, “Reward contractors for successful supply chain and indirect cost management.”
Well, yes. We agree that contractors should be rewarded for managing their supply chain, as well as for managing their indirect costs. No problem there. We liked the concept so much that we downloaded the PowerPoint training slides and added them to our website Knowledge Resources.
While the training slides too frequently restated history instead of providing knowledge, there were some nice gems to be found inside. For example, here are some points from the slides:
-
DoD pays profit/fee to prime contractors on work subcontracted by the prime contractor to subcontractors.
-
The level of profit should be calculated to reward performance. Profit on subcontracted work is meant to compensate the prime for taking on the burden of managing subcontractor risk and delivering subcontractor value.
-
The alternative is for the Government to manage the subcontractor itself ― Component Breakout.
-
Higher profit should be awarded to management of higher-risk subcontracts, and higher profit should be given when the prime succeeds in driving down subcontractor costs every year.
-
If contractors do not aggressively reduce supply chain costs, the government should consider component breakout.
-
The Program Manager should analyze if each contractor is aggressively managing and competing the supply chain in order to make breakout decision at each major milestone.
-
The Program Manager and his contracting team should structure contracts and deliverables to insure that they have the information they need to analyze and monitor supply chain management, and execute breakouts at each major program milestone and as needed to control program cost.
-
In order to facilitate active government supply chain visibility and future breakout of key sub-systems, parts, maintenance, and support, the program office needs to actively pursue and manage data rights to all aspects of the program.
While we don’t agree at all that cost reduction is the most important element of subcontractor management, we are pleased to see that DOD is distinguishing contractors on the basis of successful subcontractor management.
With respect to indirect cost management, the training slides offered the following points—
- Profit / Fee incentives should focus on reducing areas of major cost (“heavy hitters”), in order to reduce overall cost
Notice that DOD has (smartly) noted that a mono-focus on indirect costs will simply drive its contractors to make more costs direct charges. Instead of focusing solely on the indirect side, DOD will (hopefully) focus on cost reductions that affect the program’s bottom-line cost.
Look, we don’t necessarily agree with everything in this particular training deck. We don’t think cost reductions at the supplier/subcontractor level are best indicator of supply chain management success. We don’t think that more competition is a panacea and will automatically lead to reduced prices. We don’t think indirect cost reductions are as easy as DOD thinks they are, given the additional costs driven by DOD’s bureaucratic and heavy-handed regulations.
But we also think that this represents a good first step.
Why not visit DAU’s BBP Initiative site and see for yourself?
DOD Clarifies Implementation of the New CAS Threshold
We reported on the new CAS applicability threshold of $700,000 right here. One issue with the implementation of the higher threshold was how to deal with FAR solicitation provisions and contract clauses, which continued to use the old, superseded, threshold of $650,000. In our previous article (link above) we wrote—
One issue with this rule change is how to apply it to subcontracts under existing prime contracts. Although the CAS regulations have been revised, no similar revision has been made (yet) to the CAS Administration rules in FAR Part 30, nor have any revisions been made to the 52.230 series of CAS-related contact clauses. At the moment, the FAR language continues to use the now outdated $650,000 CAS applicability threshold.
We were not the only ones to figure out the problem. In fact (as we reported) one commenter raised the issue to the CAS Board itself, only to be told that addressing the issue was “beyond the authority of the CAS Board” and needed to be addressed by the FAR Councils. Given the FAR Council’s rule-making process, it will take some time—perhaps measured in months—to revised the FAR to conform to the CAS regulations.
Richard Ginman, current Director, Defense Procurement and Acquisition Policy (DPAP) decided that the DOD couldn’t wait for the FAR Councils to act. On January 31, 2012, DPAP issued a Class Deviation to DCMA Contracting Officers, providing them with revised solicitation provisions and contract clauses. The Class Deviation is linked here. The new provisions and clauses are to be used by Contracting Officers in “new solicitations and resultant contracts,” effective immediately.
The CAS-related provisions and clauses include the series 52.230-1 through 52.230-5. The provisions/clauses are to be used as directed by FAR 30.201-3 and 30.201-4—except the prescriptions in those FAR regulations “shall” be modified to read with the new CAS threshold of $700,000, instead of the current language, which contains the old, superseded, threshold.
For DOD Contracting Officers (and, presumably, for DOD Prime Contractors), problem solved.
|
DCMA Reorganizes to Better Manage its Mission
I conclude, therefore, that there is nothing more necessary in a community of men, either as a Sect, or Kingdom, or Republic, than to restore it to that reputation that it had at its beginning, and to endeavor to obtain either good ordinances or good men to bring about such a result, and not to have an extrinsic force do it. -- DISCOURSES OF NICCOLO MACHIAVELLI ON THE FIRST TEN (BOOKS) OF TITUS LIVIUS (Book 3, Chapter 1)
If you’ve been following our blog for any length of time, you know that we are not haters of the Defense Department’s oversight agencies. Both the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA) fulfill important missions that support the military service men and women, while acting as stewards of taxpayer funds. The DOD’s oversight mission is critical and we support it.
It’s just that the two agencies are so ineffectual at executing their missions.
Mind you, that’s not just our opinion. It’s also the opinion of the Government Accountability Office (GAO). We told you about GAO’s conclusion that, ““A shift to a substantially decentralized, customer-oriented approach in the mid-2000s, intended to mitigate the impact of this workforce imbalance, resulted in unintended consequences such as inefficiencies in how work was done at the CMOs [Contract Management Offices].”
In that same blog article we told you about GAO’s findings that—
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.
For its part, DCMA concurred with the GAO findings, and told the Congressional auditors that it was moving back to a more centralized management approach. DCMA was going to focus on growing its lost skill sets, especially in the areas of business system management, indirect cost management, and cost/price analysis.
DCMA recently issued a general order that reorganized its Administrative Contracting Officers along the lines promised to GAO. This article explains the reorganization. It reports that—
… CACOs, DACOs and cost monitors will report directly to the agency’s Cost and Pricing Center through the CACO/DACO Group located in Boston. This group is led by Ed Giangrande, CACO/DACO Group director. …
Giangrande said the realignment … allows the CACOs and DACOs to work together to ensure the integrity and completeness of the Contract Business Analysis Repository – the database which keeps track of contractors’ current business systems and rate status, and key acquisition information. Additionally, there will be more peer reviews of forward pricing rate agreements/recommendations, or FPRAs/FPRRs, leading to improved timeliness and quality. He said another benefit will be quicker settlement of complex contractual issues through a centralized review process.
Another benefit Giangrande sees … is the opportunity for CACOs and team supervisors to review the various work products prior to finalization by the DACOs – e.g. FPRAs/FPRRs, overhead negotiations, and cost accounting and disclosure statement issues. ‘This will ensure consistency within the corporate structure,’ he said. ‘This centralized approach will afford the CACO and team supervisor the visibility into all the major business segment contractual activities within the corporate structure.’
The article quoted DCMA Director Charlie Williams as saying—
‘It is my intention with this realignment to build a cost and pricing capability that links and unifies the community that is responsible for carrying out the business systems and indirect cost mission – the largest element of contract cost in the [Department of Defense] – into a single entity with scope, purpose and engagement that will become a dominant cost and pricing force for the Department. Nothing the agency does in support of the Department's mission affects as many contract dollars as our CACO/DACO impact on rate negotiations, cost accounting standards issue settlement and ensuring soundness of contractor business systems in producing responsible contracting practices by our suppliers. When we do our jobs right, the end result is greater assurance of the reasonableness of costs paid to contractors by DoD and greater use of the Department's resources on behalf of the warfighter and the American taxpayer.’
According to the article, the sequence of realigning the DACO/CACO network is as follows:
-
Raytheon
-
General Dynamics
-
BAE
-
UTC/GE
-
Northrop Grumman
-
L-3 Communications
-
ULA, Alliant Technologies, Jacobs Engineering, Parsons, Teledyne CSC, ITT, Shaw Group, McDermott, B&W, CBS, Booz Allen Hamilton, Unisys Ball, Johns Hopkins, Montgomery-Watson, CH2M, Rolls-Royce, Accenture Qinetic
-
Deloitte, IBM, ARINC
-
Honeywell, DynCorp, Hewlett-Packard, General Atomics
-
URS, Rockwell Collins, SAIC, Harris
-
Textron, Bechtel, GenCorp, DRS, CACI, ManTech
-
Boeing
-
Lockheed Martin
While we generally do not favor the additional layers of bureaucracy evidenced by DCMA’s new org structure, we also acknowledge that something must be done. The current defense acquisition system is broken and neither DCAA nor DCMA are currently executing their missions very well. As a result, taxpayer funds are put at risk, and the equipment and services needed by the warfighters are delayed. The status quo is unacceptable and we favor any action that will break the current logjam.
Some Labor Relations Costs Now Unallowable
We post this with the objective of completeness; we don’t expect that this will be news to many readers nor that it will impact many contractors to a significant degree. But here it is:
On November 2, 2011, the Cost Principle at 31.205-21 was revised. Here’s a link to the Federal Register announcement. But before we look at the revised Cost Principle, let’s recap the history that led to the revision.
On January 30, 2009—literally within days of taking office—President Obama issued an Executive Order entitled Economy in Government Contracting. The Executive Order stated—
It is the policy of the executive branch in procuring goods and services that, to ensure the economical and efficient administration of Government contracts, contracting departments and agencies, when they enter into, receive proposals for, or make disbursements pursuant to a contract as to which certain costs are treated as unallowable, shall treat as unallowable the costs of any activities undertaken to persuade employees -- whether employees of the recipient of the Federal disbursements or of any other entity -- to exercise or not to exercise, or concerning the manner of exercising, the right to organize and bargain collectively through representatives of the employees' own choosing. Such unallowable costs shall be excluded from any billing, claim, proposal, or disbursement applicable to any such Federal Government contract.
On October 30, 2009, the Executive Order was amended to read (in part) as follows—
Contracting departments and agencies shall treat as allowable costs incurred in maintaining satisfactory relations between the contractor and its employees (other than the costs of any activities undertaken to persuade employees to exercise or not to exercise, or concerning the manner of exercising, the right to organize and bargain collectively), including costs of labor management committees, employee publications, and other related activities. See 48 C.F.R. 31.205-21.
So it was only a matter of time before the FAR Councils started rule-making to implement the Executive Order(s). On June 14, 2010, a Notice of Proposed Rule-Making was issued for collection of public comments. The comments were reviewed and, essentially, completely ignored in drafting the final rule—as the FAR Councils made “just one minor editorial change” in response to public comments.
The Cost Principle was revised to add a new paragraph covering “persuader activities”—that is, “activities undertaken to persuade employees … to exercise or not to exercise, or concerning the manner of exercising, the right to organize and bargain collectively through representatives of the employees' own choosing.” Such persuader activities are unallowable.
Consistent with the amended Executive Order (and also consistent with the history of the Cost Principle and with the history of the Federal government’s policy towards contractors’ relationships with their workforce), costs incurred in “maintaining satisfactory labor relations” remain allowable.
As we stated at the beginning of this article, we don’t expect this revision to affect many contractors to a significant degree. Those that are affected by the revision likely already know about it. But we like to be complete about these things.
|
