Air Force Suspends Three Contractors
In early November 2011, Washington Technology reported that the US Air Force had suspended three IT contractors “after they left their work unfinished on two buildings at Andrews Air Force Base in Maryland and have been unwilling to provide information on source-code data so officials can fix their work.” The Air Force was considering debarring the three contractors from any future government work.
Who are this miscreant contractors? Washington Technology reported—
The suspended companies are Advanced C4 Solutions, Inc., a Florida-based company, which was the prime contractor, and two subcontractors, Superior Communications Solutions Inc., [SCSI] based on Georgia, and Iron Bow Technologies, based in Virginia.
Reportedly, a review of the three companies’ work “discovered 14 critical findings, 19 major findings and seven minor findings that affected the overall security and the access to the technology systems.” In addition, WT quoted the Air Force as stating, “There were also more than 145 customer-generated trouble tickets, identifying incorrectly configured network equipment, bad installation work, and a disregard for regulations on critical network security and information protection.”
Yeah, that’s not too good. But that’s not the end of the story.
WT reported that, “There was also a conflict of interest among the companies. Executives from the three companies assisted in developing requirements and cost estimates for the project. They participated in conducting market research.”
Despite all of that, the companies stopped their work and left the job site without finishing the job. Since then, they have been unwilling to provide operational manuals or source-code data, so Air Force officials can begin to fix the work. For example, the audio-visual and teleconference systems are not working because of the IT installation work isn’t done … “
The Air Force summed the situation up thusly: ““Even though [the companies] improperly developed their own contract requirements, the subjects failed to meet their own requirements.”
Our “frenemies” at the Project on Government Oversight (POGO) reported other issues with the situation. They reported—
There’s also the possibility that John Wilkerson’s dual role as majority owner of SCSI and employee of Iron Bow posed another kind of conflict of interest. According to the memo, Iron Bow, which was a subcontractor to Advanced C4 Solutions, also received multiple orders to provide audio-visual equipment and furnishings and then subcontracted with SCSI to provide material and furnishings. Did this arrangement allow Wilkerson to double-dip or, at the very least, flout regulations designed to cut down on the excessive use of subcontractors?
We rather doubt that the incestuous contracting relationship between SCSI and Iron Bow, described by POGO above, violated the Excessive Pass-Through Charge rules. But we do agree with POGO that the relationship, which appears to be other than arms-length, should be investigated further. In particular, we wonder whether the prime (Advanced C4 Solutions) knew and understood the relationship between its two subcontractors.
Regardless of POGO’s concerns, the suspension was lifted on November 28, 2011, according to this report. Details regarding the Air Force’s change of heart were not reported. Nonetheless, we wouldn’t want to see the past performance ratings of the three contractors in question.
CAS Board Moves Forward on Applicability Threshold and PPA Harmonization
We have a couple of updates for our readers regarding Cost Accounting Standards (CAS). Perhaps somebody at OFPP read our gentle chiding of the CAS Board for leaving so much business unfinished. (As we write this entry, that article has recorded nearly 700 hits, so perhaps we may be forgiven for thinking it’s been passed around.) In any case, Christmas brought us all some CAS presents.
The first item under the Christmas tree was the issuance, on December 22, 2011, of a final rule implementing a new CAS applicability threshold. In July, 2011, the CAS Board issued an interim rule on this topic, and the final rule was adopted without change. The simple description of the revision is that it raised the CAS applicability threshold from $650,000 to $700,000, to make it consistent with the current Truth-in-Negotiations Act (TINA) applicability threshold. Essentially, this rule change means that contracts valued at less than $700,000 are exempt from CAS. But there’s more to be said.
The rule change not only raises the CAS applicability threshold, it also changes it from a fixed dollar amount to being whatever the TINA applicability threshold is on a go-forward basis. In the words of the CAS Board—
This wording change … will cause future changes to the CAS applicability threshold to self-execute upon any changes to the TINA threshold as they are implemented in the FAR. … By revising the CAS applicability threshold so that it directly referenced the FAR TINA threshold for the submission of cost or pricing data (rather than referencing a stated dollar amount), any future changes to the FAR TINA threshold will automatically apply to the CAS applicability threshold (thereby eliminating the need to revise this regulation to specify a different dollar amount).
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.
It is well settled that the regulations in effect on the effective date of the contract control. So it would seem that subcontracts issued under prime contracts awarded prior to December 22, 2011 would be evaluated for CAS applicability under the old threshold. That would be the safe, conservative, course of action.
But it’s also well settled that in any conflict between CAS and FAR, CAS trumps FAR. So we think that the CAS applicability threshold found 48 CFR 9903.201-1(2) supersedes any CAS applicability thresholds found in the FAR. Accordingly, we would be prepared to argue that any subcontract administrator who used the current $700,000 CAS applicability threshold (and who continuously updated that threshold based on published changes to the TINA applicability threshold) is on solid ground and was absolutely correct.
In fact, one commenter brought this potential quandary up to the CAS Board. Their response?
The changes to the FAR to reflect the CAS Board's interim and final rules are beyond the authority of the CAS Board as acknowledged by the respondent. The comments have been sent to the OFPP Administrator, the Chair of the FAR Council, for implementation in the FAR.
No further comment.
The second issue concerns CAS harmonization with the Pension Protection Act (PPA) of 2006. We wrote about this issue right here. Well, on December 27, 2011, the CAS Board issued its long-awaited final rule, revising Standards 412 and 413 to conform CAS to the PPA. As the CAS Board reported—
This revision will harmonize the measurement and period assignment of the pension cost allocable to Government contracts, and the minimum required contribution under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, as required by the Pension Protection Act (PPA) of 2006. The PPA amended the minimum funding requirements for qualified defined benefit pension plans.
Our intent here is not to delve into the intricacies of defined-benefit pension plan accounting. We’ll spare you that headache. You’re welcome.
But we will note some “highlights” of the final rule.
- One of the big concerns with the prior Notice of Proposed Rule Making (NPRM) concerned the “triggers” that implemented the CAS accounting. The three proposed triggers have been reduced to one in the final rule.
- We reported the universal concern with the cost impact of these revisions on existing CAS-covered contracts. The CAS Board addressed that concern by mandating a five-year transition period.
- The NPRM contained controversial revisions to the segment closing pension plan adjustment calculations at 413-50(c)(12), and many commenters objected to the NPRM in that area. In the final rule, the CAS Board eliminated proposed revisions to 413-50(c)(12), and stated, “The Board believes that the issues and problems with the current segment closing and benefit curtailment provisions are beyond the scope of pension harmonization required under section 106, and should be addressed in a separate case, which the Board is considering.”
- Another controversial aspect was the effectivity date of the new rules. As the CAS Board stated—
The Board decided to delay the effective date for 60 days after publication to permit time for contractors to make the necessary changes to the actuarial valuation and cost projection systems. Furthermore, to ensure that no contractor becomes immediately applicable to the final rule, the implementation date is the first cost accounting period after June 30, 2012. The Board agrees that such a delay will eliminate a portion of the equitable adjustment claims for contractors that report on a calendar year basis.
To sum up, if you are a fully CAS-covered contractor with defined-benefit pension plans, then this final rule is a big deal. The first thing you would want to do is to update your Forward Pricing Rates to reflect the increased/accelerated pension costs under the revised rule. You would want to do that in order to price the pension costs into your proposals for new work.
The second thing you would want to do is to figure out which existing CAS-covered contract is going to be impacted by these revisions, given the effectivity date and five-year transition period. Once you’ve figure out the cost impact, then it’s time to submit your requests for equitable adjustment on all affected CAS-covered contracts (of all types, including FFP types).
For most government contractors, the revisions to CAS 412 and 413 won’t matter much. But for those few big contractors for whom this is a big deal … it’s going to be a time-consuming and potentially expensive deal as well.
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Oshkosh’s FMTV Problems Increase Along with Sales Volume
Apogee Consulting, Inc. has worked with government contractors in all industries, from the largest defense conglomerates to small not-for-profits, and pretty much everything in between. At one point a few years ago we visited a small-to-middlin’ subsidiary of a large defense contractor, located somewhere in the Midwest. We were tasked with evaluating the management team’s effectiveness and identifying opportunities for improving program performance.
(Yes, we do more than harp on FAR and CAS and DCAA audit issues. Sometimes we even get out of the back office!)
We identified a number of fairly minor issues, but we also noted that the subsidiary had only two experienced system engineers, both of whom were retirement eligible. The program management team was similarly small in number and senior in age. And there were no plans in place to deal with the impact of the inevitable retirements that were going to take place in the near future. Programs were (in the main) currently executing well; but tomorrow (metaphorically speaking) program execution was going to be a completely different story. The management team was simply oblivious to upcoming challenge of executing programs without seasoned program managers and experienced system engineers.
I’ll never forget what that General Manager said when we brought these issues to his attention: He said, “Well, in my 30 years of doing this, I have never seen any problems couldn’t be fixed by enough new orders.”
Meaning, of course, that business development and booking new orders were his priorities, and that anything that distracted him from that mission was a waste of his time. And to be fair, it’s very possible that his management metrics and incentive comp plan were focused on the winning of new business to the exclusion of other matters. It may well be that he was following his management’s wishes. But we came away convinced that his operation had a huge downstream risk that, if not addressed right then and now, was going to severely impact the execution of all those new orders he was focused on winning.
I was reminded of that story by a recent story about Oshkosh’s Family of Medium Tactical Vehicles (FMTV) program, reported in Defense Industry Daily.
In 2010, Oshkosh was awarded the follow-on FMTV production contract, reportedly worth up to $3 Billion. As we reported at the time, Oshkosh was the surprise winner, beating-out incumbent Stewart & Stevenson (now a subsidiary of BAE Systems). We also reported the views of Dr. Loren Thompson, who pointed to the Army’s FMTV award as being a poster child for the notion that a low bid price (however unrealistic) gets a better rating by the source selection authority than a more realistic, higher price. At the time, Dr. Thompson asserted that Oshkosh’s bid was “30% below what the incumbent is currently charging for identical trucks,” and that Oshkosh’s profit projection was based on receipt of “financial aid from state and local governments.”
The DID story that got us thinking about business development versus program execution stated—
… reports indicate that for this re-buy program, BAE Systems submitted a bid 20% lower than the current FMTV price, despite a supply chain for FMTV that is 60% directed source (i.e. sub-contractors and parts specified by the government). Oshkosh’s bid was reportedly 33% below the current FMTV price
The DID story also noted that Oshkosh faces challenges in executing its FMTV program. The BAE Systems team in Sealy, Texas, saw FMTV production more than triple in 2009, from 2,400 vehicles per year to more than 8,000 per year. Oshkosh faces a similar high-volume production environment. But that’s not their only challenge.
The DID story tipped us to the machinations of Carl Icahn, billionaire investor. Some of you may remember Mr. Icahn from his role in the attempted hostile takeover of the Phillips 66 oil company in the mid-1980’s, financed by the firm Drexel Burnham Lambert and its “junk bond king,” Michael Miliken. DID reported that, by December 2011, Mr. Icahn had amassed a 9.51% ownership stake in Oshkosh. What’s perhaps more interesting is that Mr. Icahn had also accumulated a 10% ownership stake in Navistar—maker of MRAPs (Mine-Resistant Ambush-Protected vehicles) such as the MaxxPro. In fact, Navistar may the single largest provider of MRAP vehicles to the US Army.
So when Mr. Icahn opined that the two companies should be merged, that got everybody’s attention. The two companies’ Boards of Directors were—shall we say?—alarmed at the prospect of a shotgun marriage, and reportedly took defensive measures in order to try to abort the plan.
Mr. Icahn listed several reasons for his proposed merger of the two companies. Reportedly, he was critical of Oshkosh management and “expressed concern” about the upcoming FMTV rebid. According to Mr. Icahn, Oshkosh management has been distracted by the rebid strategy, as well as by a recent acquisition.
When the BODs proved reluctant to move forward with his plan, Mr. Icahn launched a proxy battle in January 2012, writing in an SEC filing, he said—
We believe that the FMTV represents the single largest problem with the future of this company…. We believe this unprofitable contract represents management’s unrealistic attitude and poor planning, as well as the board’s lack of oversight on a product that represents over half of segment revenue.
Regardless of the merits of Mr. Icahn’s hostile maneuvering, it did surface financial problems with Oshkosh’s FMTV program. DID reported—
The facts of the matter do make it appear that the Army played its FMTV hand well, and Oshkosh chose a strategy that failed at every point. As BAE surmised at the time, given the value of Army-specified sub-contracts, Oshkosh’s bid could not be profitable, and has not been. Worse, the Army chose not to be interested in enhancements, which would have restored some profit for Oshkosh; they also front-loaded FMTV purchases, before price-escalation clauses in the contract could kick in.
Dr. Thompson, of The Lexington Institute, also opined on Oshkosh’s current predicament. He wrote—
The company finds itself in this predicament because it made some ill-timed acquisitions at the top of the sub-prime real estate boom (most notable lift-maker JLG), and then sought to compensate for its error by bidding very aggressively on Army truck contracts. It won the contracts and by most accounts is performing well, but profitability has been hard to sustain. Oshkosh executives apparently thought they could win more favorable terms on the Army work by proposing design enhancements, but the customer insisted on sticking with the original contract terms.
Dr. Thompson also sounded a cautionary note for the US Army. Assume Mr. Icahn gets his way and Navistar and Oshkosh merge into “a $20 billion behemoth that can dominate the domestic truck-building industry.” What does that mean for future acquisitions of Army vehicles?
Dr. Thompson cautioned—
When you are by far the biggest source of demand for a company's products, then you can pretty much dictate the terms of the relationship. When you are only one of many customers, you have less influence over how managers and investors choose to deploy their capital. In the case of Mr. Icahn, he doesn't much care what the long-term consequences of combining Oshkosh and Navistar might be for the price and performance of Army vehicles, because he is motivated by near-term financial results. The fact that submerging Oshkosh into the Navistar culture will give the Army fewer competitive options in the future is fine with him; that's how you get pricing power. So even before the Army's strategy of relying more on commercial sources for its vehicles has fully coalesced, the marketplace is sending a signal that there may be consequences service officials hadn't considered.
DID also noted a related issue. BAE Systems is no longer in the FMTV production business, with predictable results for its staff. If Navistar and Oshkosh merge, and BAE Systems is no longer a serious player—then where’s the competition. DID wrote—
Though [the Army’s] acquisition approach drove down short-term costs, in the long term, it could actually backfire on the Army by destroying 2 key suppliers. With BAE’s Sealy, TX truck plant largely emptied of work and staff … [and the Lexington Institute’s prediction of problems from the proposed merger] [one] wonders if [the Army’s] procurement victory will prove as pyrrhic as Oshkosh’s.
So you see, sometimes all the new orders in the world won’t solve your management problems. Sometimes those new orders are just the beginning of a whole new host of management problems that you never even considered. Sometimes, you can be the victim of your success, as Oshkosh appears to have been.
Improper Exclusion of Bidders on Light Air Support Award?
On December 30, 2011, the U.S. Air Force announced that it had awarded a $355 Million delivery order (and a simultaneous ID/IQ contract) to Sierra Nevada Corporation for “Light Air Support” (LAS) aircraft and associated support. Reportedly, the ID/IQ contract may end up being worth as much as $1.5 Billion. The Air Force contract award announced that—
This is a non-developmental aircraft procured for conducting advanced flight training, surveillance, air interdiction, and close air support. The LAS aircraft is a single-engine turboprop fixed-wing aircraft with tricycle, retractable landing gear, and tandem two-place pressurized cockpit with ejection seats, capable of operating from semi-prepared air fields.
The award announcement was made about one week after the GAO had dismissed a protest by a disappointed bidder—Hawker Beechcraft Defense Company, LLC (HBDC).as being “untimely”. According to the decision, HBDC had protested its exclusion from the competitive range because “multiple deficiencies and significant weaknesses found in HBDC’s proposal make it technically unacceptable and results in unacceptable mission capability risk.”
Because HBDC had been excluded from the competitive range, that left its only competitor, Sierra Nevada Corporation (SNC) as the winner by default. The SNC proposal was based on use of the Embraer A-29 Super Tucano—a plane allegedly manufactured in Brazil.
The Air Force notified HBDC that it had been excluded from consideration on November 1, 2011 and the GAO found that HBDC had received that notification on November 4. Bid protest rules require a pre-award debriefing request must be made within 3 days after receipt (see FAR 15.505(a)). Yet HBDC inexplicably waited until November 15 to request a debrief.
The contracting officer refused to provide any debriefing, because HBDC had made its request too late, and thus HBDC found itself before the GAO—where it received little sympathy and a succinct dismissal. The GAO protest decision said—
Accordingly, HBDC was required to request a debriefing within three days of its receipt of the Air Force notice on November 4, or, absent a debriefing, was required to file its protest no later than 10 days after that date. Where HBDC did not timely request a debriefing, and failed to file its protest until 17 (sic) days after it was notified that its proposal had been excluded from the competitive range, the protest is untimely and must be dismissed.
The GAO was seemingly mystified as to why it would take HBDC so long to file its protest. (And frankly so are we.) Apparently, it took the HBDC contracts manager more than two weeks (until November 15) to review the Air Force’s notification that the company had been excluded from the competitive range, and do something about it. Was the HBDC contracts manager sick or on vacation? Was he or she busy with other pressing matters? The GAO didn’t say and we may never know. But still, it says something (to us, anyway) that correspondence from a customer regarding a competition for what was potentially more than a billion dollars’ worth of business just sat in an in-box for two weeks.
In a footnote, GAO offered a subtle suggestion that might lead to a resolution of the issue. It said—
Although the Air Force is not required to provide HBDC with a preaward debriefing due to HBDC’s untimely debriefing request, we note that the Air Force is not prohibited from providing HBDC with such a debriefing, so that HBDC can have a full understanding of the basis for its exclusion from the competition.
As far as we can tell, the Air Force declined to provide HBDC with a “full understanding” of its proposal deficiencies.
Normally, that would be the end of the story. Protest filed; protest dismissed. Better luck next time. But that was not the end of this story.
HBDC then did two things. First, it issued a press release that said—
‘We are disappointed in the GAO’s decision as we were relying on their investigation to provide transparency into what has been a bidding process of inconsistent, irregular and constantly changing requirements,’ said Bill Boisture, Hawker Beechcraft chairman and CEO. ‘We find ourselves still without answers, which is unacceptable, and continue to believe that our exclusion from this important contract was made without basis in process or fact.’
‘As a U.S. company, we believe we deserve a fair chance at this contract,’ Boisture said. ‘Hawker Beechcraft has been delivering U.S. Department of Defense aircraft certified to military specifications for more than 50 years. We are qualified and prepared to continue doing so for the Air Force’s LAS operations with our capable, affordable and sustainable AT-6 aircraft.’
‘We are asking concerned Americans, members of the flying military and anyone else dedicated to the success of U.S. manufacturing, preservation of the aerospace industrial base and U.S. tactical air power to take action to ensure the AT-6 gets proper consideration for this Air Force contract. Visit the AT-6 website at www.missionreadyat-6.com to send a letter to your congressional leaders.’
Second, the company filed a suit in the U.S. Court of Federal Claims. As part of that suit, it asked the Court to issue a temporary restraining order that would prevent the Air Force from executing the LAS contract with SNC.
That second step resulted in the Air Force sending SNC a Stop Work Notice pending resolution of the matter. According to this Washington Post story, the Air Force “decided put its own stop work order in place before the court ruled on the temporary restraining order.”
The same Washington Post story also reported that—
Hawker Beechcraft CEO Bill Boisture and U.S. Rep. Mike Pompeo planned a news conference Friday [January 6, 2012] to talk about the developments. U.S. Sen. Pat Roberts said Hawker Beechcraft deserves more answers as to why it was excluded from the competition. ‘On every turn, the Air Force has denied the company and the congressional delegation the opportunity to understand why it made the decision,’ Roberts said in a statement.
Okay, stay tuned for further developments on this interesting story.
But before we leave it, readers should note that HBDC is pulling out all the stops on this one. We’re guessing that the potential revenue from this contract made it a “must-win” for the company, and that everybody is scrambling to address the issues involved in the fiasco.
And fiasco it was, make no mistake.
The Air Force could have resolved this with some open communication as to why HBDC was excluded from the competitive range. Sure, they didn’t have to but, as GAO pointed out, there was nothing preventing them from doing so. And so now we have Congress involved. Not to mention a very important warfighter support contract on hold. Remember, the Commander-in-Chief has promised taxpayers more transparency, and his folks clearly are not living up to his pledge.
HBDC still has to explain (to its Board of Directors and shareholders, if to nobody else) why a critically important piece of correspondence lay unopened for two weeks, letting regulatory deadlines lapse in the meantime. (We would not want to be in that contracts manager’s seat right now….)
Not to mention, of course, why its proposal for such a “must-win” competition was so flawed that the Air Force threw it out as being (essentially) uncorrectable. Did HBDC have the right skill sets? Did they put the company’s varsity team on the proposal? What went wrong?
It is incorrect to posture this story in terms of “USA versus Brazil”. That’s not what this is about. What it is about, quite clearly, is having the Air Force act like stewards of taxpayer funds, and explain their decision-making. The Air Force is hunkered-down and lawyered-up, and acting like this is an adversarial relationship. Instead, they need to come clean and make this all go away.
HBDC needs to understand why it screwed-up, so we can get the warfighters the light air support (and reconnaissance) necessary to minimize the loss of life in the war zone.
That’s our take, anyway.
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What’s it like to work at the Aerospace Corporation, a Federally Funded Research and Development Center (FFRDC), where most of the work is performed for Federal entities such as NASA, the US Air Force, or for the National Reconnaissance Office (NRO)—and is deeply classified? We don’t know for sure, but we’ve heard stories from folks who’ve worked there—and we’ve also heard stories from folks who’ve audited there. We’ve also read some stories, as well.
