Ah, to be a Nontraditional Defense Contractor
We recently submitted a paper to the NCMA Macfarlan Writing Program, in which we compared the acquisition reform efforts of the Obama Administration to those of the Clinton Administration. The bottom-line is that we characterized the Clinton-era reform efforts as being focused on decentralization and individual discretion while breaking down market-entry barriers, while we characterized the Obama efforts as being focused on centralization and enhanced oversight. But of course that was an oversimplification.
We were reminded that the reality of the situation is more complex than any medium-length paper can describe, when a final DFARS rule was published in the Federal Register, creating opportunities for DOD acquisition officials to award contracts to “nontraditional defense contractors” via streamlined procedures for acquisitions of “military-purpose nondevelopmental items.”
As the final rule states—
Under this pilot program, DoD may enter into contracts with nontraditional defense contractors for the purpose of--
--Enabling DoD to acquire items that otherwise might not have been available to DoD;
--Assisting DoD in the rapid acquisition and fielding of capabilities needed to meet urgent operational needs; and
--Protecting the interests of the United States in paying fair and reasonable prices for the item or items acquired.
This pilot program is designed to test whether the streamlined procedures, similar to those available for commercial items, can serve as an effective incentive for nontraditional defense contractors to (1) channel investment and innovation into areas that are useful to DoD and (2) provide items developed exclusively at private expense to meet validated military requirements.
Sounds pretty Clinton-like, doesn’t it?
How does the pilot program work? Well, the final rule doesn’t tell you that. It basically just says the interim rule is being adopted as a final rule without changes. For the intricacies of the pilot program’s inner workings, you need to go to that interim DFARS rule, published in the Federal Register on June 29, 2011.
From the interim rule, you can see that a new DFARS Subpart (212.71) has been added to the DFARS Section on Commercial Item Acquisition (Part 212). Essentially, contracting officers may treat qualifying contract actions awarded to qualifying companies as acquisitions of commercial items. But as they say, “the devil is in the details.”
Let’s get dirty into the details, shall we?
The first thing you need to know is how to determine whether a company is a nontraditional defense contractor. According to the rule, a nontraditional defense contractor …
… means an entity that is not currently performing and has not performed, for at least the one-year period preceding the solicitation of sources by the Department of Defense for the procurement or transaction, any of the following for the Department of Defense--
(1) Any contract or subcontract that is subject to full coverage under the cost accounting standards prescribed pursuant to Section 26 of the Office of Federal Procurement Policy Act (41 U.S.C. section 1502) and the regulations implementing such section; or
(2) Any other contract in excess of the certified cost or pricing data threshold under which the contractor is required to submit certified cost or pricing data.
You might also want to understand what procurement actions are subject to the opportunity to use streamlined procedures. The streamlined procedures are available for “military-purpose nondevelopmental items”.
What are those items? The rule states—
Military-purpose nondevelopmental item means a nondevelopmental item that meets a validated military requirement, as determined in writing by the responsible program manager, and has been developed exclusively at private expense. An item shall not be considered to be developed at private expense if development of the item was paid for in whole or in part through--
(1) Independent research and development costs or bid and proposal costs, per the definition in FAR 31.205-18, that have been reimbursed directly or indirectly by a Federal agency or have been submitted to a Federal agency for reimbursement; or (2) Foreign government funding.
In order to avail themselves of the streamlined procedures, contracting officers must award contracts that meet the following requirements. The rule states—
Each contract entered into under the pilot program shall--
- Be awarded using competitive procedures;
- Be a firm-fixed-price contract, or a fixed-price contract with an economic price adjustment clause;
- Be in an amount not in excess of $50 million;
- Provide--
- For the delivery of an initial lot of production quantities of completed items not later than nine months after the date of the award of such contract; and
- That failure to make delivery as provided for under paragraph (d)(1) may result in termination for cause; and
- Be--
- Exempt from the requirement to submit certified cost or pricing data;
- Exempt from the cost accounting standards under section 26 of the Office of Procurement Policy Act (41 U.S.C. 1502); and
- Subject to the requirement to provide data other than certified cost or pricing data for the purpose of price reasonableness determinations.
One final point. As the rule-makers noted in the final rule, this opportunity is only authorized by statute with respect to awards of prime contracts by the DOD. They expressly stated that it is not to be flowed-down by prime contractors to subcontractors—i.e., it cannot be used by prime contractors or higher-tier subcontractors At least, that’s the opinion of the DAR Council. We’re not so sure that Congress would agree with that interpretation of the statute.
But if you happen to qualify as a “nontraditional defense contractor” and would like to sell “military-purpose nondevelopmental items” to the Defense Department, then this pilot program might well be your ticket.
On the other hand, if you are truly a “nontraditional defense contractor” then we don’t expect you’d be reading this blog, now would you?
DCAA Sought Expanded Subpoena Power
Many times we are asked where we source these blog articles. The truth is that we subscribe to many different news services and receive many emails each day regarding government contracting matters. We subscribe to the Department of Defense’s email feed. We use Google Alerts. And when a story catches our eye, we save it to a file until we have time to get to it.
Sometimes it takes us a while to get to a story—such as this one, which was reported in July 2011. Yeah, it’s been six months since GovExec and POGO reported the DCAA’s hunger for expanded subpoena power. Sue us.
Conspiracy-minded POGO asked its readers, “Did the Pentagon ignore proposals by the Defense Contract Audit Agency (DCAA) to increase oversight of federal contractors and save taxpayer dollars?” POGO reported that, while under April Stephenson’s leadership, the audit agency requested expanded power to obtain contractors’ records through issuance of subpoenas. POGO reported that Shay Assad (former Director, Defense Procurement and Acquisition Policy at the Pentagon) did not support DCAA’s request, and effectively killed it.
POGO reported DCAA’s rationale for its request as follows—
‘Because the courts have limited DCAA's access to contractor records under the existing laws, the proposed amendments are needed to provide DCAA with the access required to obtain sufficient evidence to comply with the applicable auditing standards.’
POGO also noted that the Associated Press reported that DCAA has not used its existing subpoena power “in over 20 years.” Naturally, one has to wonder what the audit agency would do with expanded subpoena power, since it didn’t even try to use its existing power.
Further, one wonders at a rationale that uses judicial rulings as the statement of need, as opposed to factual data regarding contractor denial of access to records—or even anecdotes of such denials. Suffice to say, it seems to be have been better headline material than it was a substantive request. POGO apparently agreed with our assessment, since not much (if any) more has been reported on the subject in the past six months.
GovExec did not have much more to report on the story either, except perhaps for quoting POGO. (Seems a bit incestuous to us, but perhaps that’s just how the modern news media works?) GovExec reported—
‘If you want an effective and aggressive audit agency that roots out waste in contracting, it needs to have the power to compel contractors to produce internal documents,’ said Nick Schwellenbach, POGO's director of investigations.
In addition, GovExec quoted Alan Chvotkin, Executive Vice President of the Professional Services Council (PSC) thusly—
On subpoena power, Chvotkin said, the impetus comes from the fact that some ‘contractors in the past didn't provide timely access to records, and DCAA views any resistance from contractors as an inappropriate obstruction.’ But, he said, DCAA has an ‘insatiable appetite for records’ and sometimes bullies contractors -- some of the records they seek may involve ongoing investigations or personnel issues, he said.
Chvotkin said Pentagon procurement chief Assad and the Defense inspector general ‘to their credit told DCAA 'if you've got that kind of recalcitrant contractor, come to us for the authority we can use,' ‘ which is an approach PSC supports.
And that would be the end of the story and the end of this article. Except for the comments at the end of the GovExec story, purportedly left by current and former DCAA auditors. We reprint some of them for your edification and amusement, unedited except for length (which is denoted by ellipses).
- Take a look at where the Defense Contract Audit Agency is now. The ‘new’ director and his pack of SES drones with their boot licking minions have effectively paralyzed the Agency. The ability of the auditors to perform their work has been crippled by extreme and needless ‘oversight’ and thwarted by the ‘misguidance’ spewing forth from Headquarters. The ‘quality reviews’ have spread over the organization like the black plague, killing any initiative or creativity that might possibly help get the mission accomplished. And there are those ‘Internal Review Directorate’ inquisitions which are spearheaded by one of the finest examples of tyrannical behavior and ineptitude. We can sadly look back now at what might have been or what was. Looking ahead there is nothing but disaster coming straight at DCAA. All brought about by a monstrous failure at the top. (Ben)
- … And of course, this all begs the question, SO WHAT? Of more immediate concern is that DCAA is years behind at getting incurred costs audits done and cannot audit a forward pricing proposal in anything less that about 90 days. Rumors are flying that all of the work we do for other government agencies is being auctioned off to the private sector (i.e. CPA firms). Most of us long time employees are just holding on hoping to reach retirement before the wheels come completely off the bus. (DCAA Supervisor)
- … DCAA today is completely broken thanks in large part to our new Director who just does not get it. What good is an audit agency that is unable to get out of its own way? We have CIGIE teams creating total havoc. Nothing is acceptable!!! These people are devoid of reason or common sense. What good is an audit if it never sees the light of day or is issued so late as to be useless to an end user? Everyone in DCAA is paralyzed by fear and indecision. We have a Wizard of Oz like culture where Dorothy is lost in Kansas and all she can do is be critical of everything but never offer any solutions on finding our way. It's easy to be critical but until these super stars have any answers to provide value to the taxpayer, what good are they??? … (Toto)
- Way to go April, those in the field had no idea you made such as bold move in your final days. The subpoena authority has become a moot point under Fitzgerald because we do not perform audits anymore, we just make pretty working papers. (Ed)
- … The answer is clear, contractors hide information from DCAA to protect unreasonable profits, pure and simple. Let's get real Chvotkin. You know that if the data and records helped contractors, they would gladly provide it to DCAA. (Hummm)
- Blog, blog and blog some more and may be someone will get it that DCAA is in horrible condition under Fitzgerald. We cancel more assignments than we issue. Our audit hours are spent on endless working papers. We no longer audit, we just tick and tie numbers and write volumes on how we made the tick and how we confirmed the tie. It is very sad that DCAA slipped so quickly under Fitzgerald. … (Blog Away)
- Boo-hoo to the lot of you. DCAA hasn't changed, no matter who sits in the Director's chair. The issue begins and ends with cultural system in DCAA. Forget about the audit process for moment, and consider the behavior. Arrogant, vicious union officers who are unable to construct an intelligble sentence; auditors in managment positions who have no managment skills but look good on paper; regional staff (former auditors) with no skills other than being politically connected; and auditors who require an accomadation allowing them to collect a GS12 salary and perform as a GS7. Each and everyone of us in this (expletive)-hole should be looking to ourselves and how we can improve the agency, and it's doubtful that will ever happen, we're just to caught up in ourselves. (A Tisket, A Tasket)
- What will DCAA do when we are nine years behind on performing incurred cost audits and the people who prepared the claims are long gone from the companies? DCMA will do the work and we will still be making GAGAS compliant work papers on contracts that were awarded three months before the report is issued, to satisfy a group of CIGIE internal auditors. … (Captain Smith)
- … Visit my office and I'll tell you about what is really happening in DCAA. Two of five teams in my office do nothing but process vouchers. Second, the only audits we perform are forward pricing. The CIGIE police have gigged my office to death on forward pricing especially FPRAs and we waste hundreds of hours on just working paper documentation. Third, my backlog of incurred cost is growing and I have no hope of ever getting to it. We have not auditing an incurred cost submission since 2009. Lastly, we have lost all credibility with contracting officers and they are awarding contracts and closing contracts without DCAA audits because we are not timely. We want to issue reports on time, but the working paper requirements and the review process is so onerous that we cannot possibility be timely. … (Clueless at the Top)
- There are many other comments in the GovExec article, but space (and fear of an allegation of copyright infringement) prevents us from printing any more. Our readers can peruse all 49 comments by following the link posted above.
The comments are hardly representative of the entire DCAA workforce, they probably don’t even qualify as an unbiased statistical sample. Nonetheless, several strike us as being very much on point, and worthy of contemplation by DCAA leadership.
We at Apogee Consulting, Inc. work with DCAA auditors frequently—as in, every work day. Generally speaking, we find them to be focused on doing the right thing and on protecting taxpayer funds. Our problems typically are not with the average DCAA auditor or Supervisory Auditor. No, our problems typically stem from the troubling guidance issued by Fort Belvoir, as aided and abetted by equally troubling guidance issued from Fort Lee. We are somewhat gratified that the comments we’ve posted—which do seem to come from knowledgeable insiders at the audit agency—seem to bear out our perceptions.
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United Space Alliance is the Status Quo of Space Launch Capability
 A recent story at Aviation Week & Space Technology discusses challenges faced by the United States as it looks to the future of its space launch capability. It told its readers—
The U.S. must overcome the growing challenges of rising launch costs and aging propulsion systems if it is to gain much needed efficiencies and maintain its global lead, warns Gen. William Shelton, commander of Air Force Space Command.
Although the past 81 consecutive national security launches mark “an unprecedented record” for U.S. space launch, Shelton says ‘we pay a huge financial premium for that success.” Alternatives must be found to offset these costs, he adds. “Don’t get me wrong. I’m not suggesting we want to do launch on the cheap, but there are places we can look to reduce costs without affecting our sterling record of success,’ he says.
Speaking specifically about the RS-68 and RL10 engines that form the propulsion backbone of the current Evolved Expendable Launch Vehicle (EELV) launcher fleet, Shelton says ‘the RS-68 was designed about 20 years ago and the RL10 was originally designed back in the 1950s — for technology that’s pretty doggone old.’ And the upper-stage engines are ‘red-lined on just about every launch we do, running at 25% over the originally designed chamber pressure,’ he adds. ‘I’ve said for years that the person or company or person who finds a breakthrough in space propulsion will become very wealthy. It’s got to happen because it’s just too expensive to get hardware and people to orbit.’ …
Although engine performance is currently adequate, Shelton believes the real benefits could be found in improving manufacturing processes, which he adds ‘leave a lot to be desired.’ Citing the Pratt & Whitney Rocketdyne RL10, he says each engine ‘requires more than 8,000 man touch hours — more than a hand-built Lamborghini if you can believe that.’
The EELV fleet is operated by the United Launch Alliance, a “50/50 joint venture” between Lockheed Martin and The Boeing Company. The Pentagon recently awarded ULA a firm, fixed-priced contract valued at $1.5 Billion for the launching of “three top secret U.S. spy satellites and six other critical national security spacecraft” by mid-2014. The news story (link above) reports—
Among the cargoes: three National Reconnaissance Office payloads, two Navstar Global Positioning System (GPS) spacecraft, two Defense Meteorological Satellites Program (DMSP) military weather satellites, an advanced Navy 3G communications spacecraft and a payload dubbed Air Force Space Command-4.
That’s great news for the joint venture, which historically has been relative immune from budget cuts because of its importance to the USA’s national security. But that doesn’t mean that its operations have been trouble-free.
For instance, we’ve posted a couple of stories about allegations that ULA may have reaped $271 million in improper payments from its government customers. The last time we heard about this issue was back in August 2010, when we reported that DCAA Director Pat Fitzgerald—
… called on the Defense Contract Management Agency (DCMA) to notify the United Launch Alliance team (of which Boeing is one of two team members, along with Lockheed Martin) that the costs are in non-compliance ‘with federal accounting standards’ and are ‘unallowable.’
DCMA did not make that notification at the time, nor have we heard much from the agency regarding this issue since then.
More recently, GAO issued report GAO-11-641 in October 2011, in which it stated—
DOD officials believe the launch industrial base is unstable and plan to implement an acquisition strategy they believe will help stabilize it. The leading proposal would commit the government to a block buy of eight common booster cores--the main component of a launch vehicle--each year, for a 5-year term. However, this approach may be based on incomplete information and although DOD is gathering data that it needs as it finalizes the new acquisition strategy, some critical knowledge gaps remain. …
Additionally, some subcontractor data needed to negotiate fair and reasonable prices are lacking, according to Defense Contract Audit Agency (DCAA) reports, and some data requirements were waived in 2007 in exchange for lower prices. Mission assurance comprises numerous activities to ensure launch success, but DOD has little insight into the sufficiency or excess of these activities. The expected block buy may commit the government to buy more booster cores than it needs, and could result in a surplus of hardware requiring storage and potentially rework if stored for extended periods. Also, DOD is gaining insight into the rise in some engine prices, expected to increase dramatically in the near term, but it is unclear how this knowledge will inform the expected acquisition approach or subsequent negotiations. …
So the status quo has been very nice for ULA (absent a few bumps along the way), but the status quo may be changing in the future, because of new companies eager to enter into the EELV marketplace. Among those new companies is Space Exploration (SpaceX). We’ve reported on SpaceX before—notably right here.
In October 2011, SpaceX issued a press release that stated—
The U.S. Air Force is the largest launch customer in the world, but is currently served by a monopoly provider whose prices have consistently risen. Equitable criteria for new entrants, coupled with meaningful opportunities for competition, would save the American taxpayer billions.
‘Fair and open competition for commercial launch providers is an essential element of protecting taxpayer dollars,’ said Elon Musk, SpaceX CEO. ‘Our American-made Falcon vehicles can deliver assured, responsive access to space that will meet warfighter needs while reducing costs for our military customers.’
ULA appears to be nicely positioned for the near term. But in the longer term, we suspect its sweet status quo position will be threatened by smaller, less expensive, more nimble innovators such as SpaceX.
Navy Tells Huntington Ingalls Its Ships Cost Too Much
 The leadership team at Northrop Grumman looks like geniuses, since they decided to spin-off the company’s ship-building business last year into an entirely separate company called Huntington Ingalls Industries, Inc.
We’ve reported on this new defense contractor before. In this story, we reported that DCAA was having trouble auditing the project cost savings claimed by Northrop with respect to consolidation and spin-off of its shipbuilding business. And more recently, we reported on the imposition of payment withholds by the Navy because of multiple deficiencies in Huntington Ingalls’ EVMS.
To sum up, Huntington Ingalls is no stranger to this site. So there should be no surprise that the rough waters continue for the shipbuilder, and it finds itself, once again, the subject of another article.
This time, the company hit the newswires again, when Navy acquisition chief Sean Stackley told the audience at the annual conference of the Surface Navy Association that Navy ships under construction at the Huntington Ingalls shipyards cost too much. This Reuters story reported the comments thusly—
… Stackley said the company was over the government's target price for a number of LPD ships under construction, and had hit the cost ceiling established in a fixed price contract for LPD-22, the second ship delivered at the Ingalls shipyard in Pascagoula, Mississippi. … He said the Navy was working closely with Huntington Ingalls to drive cost out of the USS Gerald R. Ford (CVN 78) aircraft carrier, but was trying to ‘hammer home’ the need for additional efforts.
Huntington Ingalls Chief Executive Mike Petters said the company had already taken charges for the cost overruns on the LPD ships 22 through 25, but said the company was doing better with LPD 26, which is in the early stages of production.
Huntington Ingalls last week responded to reports that the carrier would likely be $884 million over budget by saying it was continuing to see improvements in its performance on the aircraft carrier.
Petters said both the company and the Navy knew at the outset that building a first-in-class ship as complex as an aircraft carrier involved risk, and they had agreed on a formula for sharing that risk.
If industry had to shoulder the risk of new development programs completely on its own, he said, the cost of new warships and other weapons would skyrocket because defense companies would raise prices to cover the added risk.
We have asserted that “should-cost” will be the DoD’s buzzword in 2012. We think the stories about the Huntington Ingalls shipyards are but the start of what will turn out to be a continuing series of common-theme stories in the coming year.
If you are a long-time readers of our articles, you already know that we are on record as asserting that program execution—on-time and on-budget performance—is the single key to staying in the Pentagon’s good graces. We think Huntington Ingalls is pushing the performance envelope … in the wrong direction. We hope the situation turns around for the shipbuilder, we really do.
But we are not very optimistic that it will.
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