ASBCA Demonstrates Knowledge of FAR Cost Allowability Rules, Not So Much on FAR Contract Administration Processes
An old legal adage says that “bad cases make bad law”. By this we take it that bad rulings make hard compliance. A recent ASBCA ruling on a motion for reconsideration in the appeal of SRI International (ASBCA No. 56353, issued October 5, 2011) is a good exemplar of what we mean.
SRI International’s original appeal to the Board under the Contract Disputes Act concerned the allowability of Letter of Credit (LOC) fees over a two-year period. The Board found that the costs were allowable. As the Board decided—
When the government disallows costs on the basis of a FAR cost principle, the burden is on the government to prove that the costs are unallowable. … In disallowing SRI's LOC costs … the government relies solely on FAR 31.205-20. In pertinent part, this cost principle disallows ‘costs of financing...capital.’ ’Capital’ is defined to mean ‘net worth plus long-term liabilities.’ … SRI has treated all of the $25 million worth of bond debt… as a part of its ‘Current liabilities.’ ... Thus, even though the … Bonds have a maturity date of 2028, from an accounting standpoint, SRI's financing of its renovation project has actually been, and is, raising capital in the short-term, not long-term.
The government has not challenged as inappropriate SRI's treatment of the full amount of its long-term bond debt as a part of its ‘Current liabilities.’ It has not explained why FAR 31.205-20 disallowing the cost of financing—which specifically defines capital as ‘long-term liabilities’—is applicable in view of that treatment. We conclude that FAR 31.205-20 is inapplicable to disallow the fees SRI paid for the LOC required to secure its long-term bond debt in the short-term (one year).
So that would be the end of the matter, with the Board finding that SRI’s Letter of Credit fees to be an allowable indirect expense, but for the government’s motion for reconsideration.
In its motion, the government did not challenge the Board’s ruling that SRI’s LOC costs were allowable; instead, the government asked the Board “to clarify the portion of the decision that could be interpreted as making a lump sum monetary award plus interest.”
In its original ruling, the Board stated, “…this appeal is sustained in the amount of $609,621 with interest pursuant to 41 U.S.C. § 611 running from the putative receipt date of 21 September 2007.” The Board’s direction contradicted an agreement struck between SRI and the government while the decision was pending. That agreement called for the following –
The parties agree that the overhead rates established by this Agreement include disputed costs. In order to expedite the settlement of these rates and factors, these costs have been provisionally allowed. If ASBCA concurs with the Contracting Officer’s Final Decision (COFD) finding the costs unallowable, the Contractor agrees to make separate payment to the Government of the amount of G&A expenses overpaid by the Government, plus interest, under the contracts subject to this Agreement by reason of the cited noncompliance. If the contractor prevails in the aforementioned ASBCA case, it is agreed that no adjustments to the rates established by the Final Overhead Agreement for SRI International’s FY 2005 shall be made.
The government’s concern was that the Board’s direction “could be interpreted as awarding SRI ‘a lump sum payment … with interest …’ as opposed to allowing SRI to ‘recover the LOC costs as part of the final overhead rate settlement process …’.” According to the Board, the government contended that, “the exact amount SRI will recover under all the affected contracts may not necessarily be $609,621” and, as a result, SRI might “recover more money than it is entitled to recover under the affected contracts.”
For its part, SRI told the Board that it agreed that it was not entitled to a lump-sum payment with respect to the previously disallowed LOC fees. However, SRI contended that it was entitled to a lump-sum payment for interest as computed by the Contract Disputes Act.
The Board explained that—
To be clear, what our decision holds is that the LOC costs SRI incurred in FYs 05 and 06 are allowable indirect costs, and SRI is therefore entitled to include the LOC costs in its indirect G&A cost pool for those years. This, however, is not the end of the process. As envisioned in the Allowable Cost and Payment clause and FAR 42.705-1, the allowable LOC costs for FYs 05 and 06 still have to be allocated to the affected contracts and be scrutinized against the terms of those contracts before the actual amount of allowable LOC costs under each affected contract may be determined. Thus, the final indirect cost rate establishment process must run its course.
The Board quoted its decision in ATK Launch Systems and the Court of Federal Claims’ 2007 decision in ATK Thiokol v. US, stating—
The consequence of an award of monetary damages in this case is only that the award will be included in the G&A pool applicable to the affected contracts. … To the extent that the court’s award implicates cost ceilings, incentive provisions or other clauses of particular contracts, the DACO, not the court, will make any necessary interim adjustments. … Ultimately, a final indirect cost rate and the final amount due under each contract will be established by the DACO, reconciling any payments that have been paid out on an interim basis, including any damages awarded by the court.
The Board rejected the government’s argument that CDA interest cannot be awarded in this case because “until such time as SRI submits its completion vouchers for FY 2005 and FY 2006, the Government’s contractual obligation to make final payments for the allowable indirect costs does not arise.” Instead, the Board decided that “the amount found due is the total amount of LOC costs … and paid pursuant to FAR 52.216-7(h) as a consequence of our decision.” Moreover, “the CDA interest on the FYs 05 and 06 LOC costs due SRI will be computed from [the date SRI filed its CDA claim] and run until paid under each affected contract….”
The Board’s ruling makes good legal sense. It is also ridiculous.
Under the Board’s logic, SRI is entitled to interest on its CDA claim, but that interest needs to be computed as follows:
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Determine how much LOC costs for FYs 2005 and 2006 were allocated to individual contracts.
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Determine which contracts can recover those costs. For example, firm fixed-price contracts do not permit recovery of any increased contractor costs.
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For contracts that do permit cost recovery, determine how much can be recovered, contract by contract. For example, if recovery of the additional costs puts the price above the amount of funding available, then the contractor cannot recover.
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For contracts that permit recovery, prepare and submit final vouchers.
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Determine the date on which the government pays the final vouchers.
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CDA interest is the amount determined to be recoverable in Step 3, applied to the period between the date the claim was submitted and the date the final voucher was paid.
The Board’s decision is impractical and, hopefully, the parties will figure out a way around it.
First of all, the very definition of G&A assumes that there is no individual beneficial or causal relationship between an element of the G&A expense pool and an individual final cost objective (contract). See FAR 31.201-4(c). It is literally impossible, from a government contract cost accounting viewpoint, to determine how much of the LOC costs (as individual cost items) would be allocated to any particular contract. If such a relationship could be determined, then the LOC costs should not have been included in SRI’s G&A expense pool.
Second, to have to calculate interest due on a contract-by-contract basis is infeasible and borders on the absurd. SRI will have to wait until its FY 2006 indirect costs are audited and negotiated. As we all know, that could take years. Then it will have to submit final completion invoices and determine when the government pays those vouchers. Then it will have to submit another request for payment (to the DOD Judgment Fund, we assume) and wait for that payment to be made.
Such an approach, we believe, eviscerates the intent of the Contract Disputes Act. Instead of acknowledging the time value of funds lost through an erroneous Contracting Officer’s Final Decision, the methodology outlined above might actually end up costing SRI more to implement than it obtains in CDA interest payments.
It seems to us that a much more workable solution would have been to allow SRI to include the LOC costs in its G&A expense pool but have the government issue a lump-sum payment for CDA interest, based on the ratio of cost input in the cost-reimbursement (and perhaps T&M) contract types to the total G&A allocation base, times an agreed-upon duration. Have the government cut SRI a single check for interest only, and let that be the end of it.
The ASBCA did a good job with respect to the determination of cost allowability. But it did a poor job with respect to understanding how government contract administration works. This decision, if followed literally, will result in a burdensome and expensive solution to what was an easily negotiated solution.
As we said in the beginning, “bad cases make bad law”. And bad rulings make hard compliance.
Dan Gordon Leaves Legacy of Unfinished Business at CAS Board
In his periodic regulatory update newsletter, respected attorney and ADR judge Charles Rumbaugh reported—
Dan Gordon, Administrator for the Office of Federal Procurement Policy, announced that later this year he will be leaving the post to serve as Associate Dean for Government Contracts Law at the George Washington University Law School.
“Yeah; so what? Why is this even worth reading about? And who’s Dan Gordon?”
We can answer those questions. For those readers who are not familiar with the intricacies of inside-the-Beltway-bureaucracy, the OFPP Administrator sets procurement policy across the Executive Branch, and also acts as Chair of the CAS Board. So when it is reported that the OFPP Administrator is moving on, that also means that the CAS Board is rudderless until the new Administrator is confirmed.
So that’s the big deal.
As this article reports—
Gordon spent much of his tenure focusing on strengthening the acquisition workforce, including trying to grow the number of contracting officers and other key positions. OFPP also set new standards and certification requirements for contracting officer representatives … Through training sessions at the Federal Acquisition Institute and the Defense Acquisition University, OFPP can track how agencies are growing both the number and training of contracting officers and their representatives.
Yes, that’s true insofar as it goes. But what the story doesn’t report is how little Mr. Gordon accomplished as Chair of the CAS Board.
Sure, the CAS Board recently killed a CAS exemption. And they are currently considering conforming another exemption to match recent changes to the FAR Part 15 TINA rules. And they’ve published an interim rule that conforms the CAS applicability threshold to the TINA threshold (currently $700,000). But that’s about it. The list of unfinished business and/or unfinished work is much longer than the list of CAS Board accomplishments. Let’s look at what hasn’t been done ….
First and foremost, the CAS Board has failed to issue a final rule on “pension harmonization” that would align Standards 412 and 413 with the Pension Protection Act of 2008. As we’ve reported before, “Congress required the CAS Board to publish a ‘CAS Harmonization Rule’ by not later than January 1, 2010, with a mandated applicability date of January 1, 2011.” Well, here it is in early December, 2011, and we’re still waiting for that rule. Astute readers will notice that the CAS Board is coming up on a milestone—it is about to miss the congressionally mandated deadline by two years.
And this is a big deal, in and of itself, because (as we said), “…someday soon there is going to be a reckoning, as CAS-covered contractors with defined benefit pension plans notify contracting officers of the contract price increases stemming from the new CAS rules.”
On August 26, 2011, the CAS Board published a notice that it was discontinuing its efforts to amend CAS 416 regarding use of the term “catastrophic losses”. In its notice, the CAS Board gave a brief history of its efforts, stating—
In a letter dated September 26, 2000, the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics requested that the Board consider whether the word ‘catastrophic’ in the term ‘catastrophic losses’ should be replaced with a term such as ‘significant’ or ‘very large’ in [CAS 416 at] 9904.416-50(b)(1) in order to (a) more closely align the Standard with what was intended by its original promulgators and (b) eliminate any confusion between 9904.416-50(b)(1) and FAR 31.205-19, Insurance cost. At its May 13, 2005 meeting, the CAS Board directed the staff to begin work on a Staff Discussion Paper (SDP). On January 26, 2006, the Board published the SDP, ‘Accounting for Insurance Costs’ (71 FR 4335) which in particular, addressed the use of the term ‘catastrophic losses’ in CAS 416.
So, to be clear, this specific effort was requested by the DOD in 2000. After five years, the CAS Board began its efforts, culminating in an SDF published a year later in 2006. Since then … nothing. Now, after another five years have passed, the CAS Board says that there never was any need for any effort in the first place, stating—
Although CAS 416 has been in effect for over 30 years, the respondents provided no data on problems or disputes related to the meaning of the term ‘catastrophic losses.’ At this time, the Board believes that no amendments to CAS 416 regarding the use of the term ‘catastrophic losses’ are necessary and is hereby discontinuing further rulemaking in this case.
In other words, it took the CAS Board eleven years to conclude that its efforts would be more productively spent elsewhere.
On the same day (August 26, 2011), the CAS Board also published another notice stating that it was discontinuing is efforts to amend CAS 403. For those unfamiliar with the Standard, it requires that contractors use a “three-factor formula” to allocate residual home office expenses, when those residual home office expenses exceed a proportion of certain revenue thresholds. The revenue thresholds have not been updated since the original promulgation of Standard 403 in 1973. Since then, there has been significant inflation (reportedly on the order of 400 percent) and, at the urging of interested parties, an industry group and a Federal agency, the CAS Board started an effort to determine whether it was time to update the revenue thresholds.
(That would seem to be a no-brainer. Yet the CAS Board worked on the project for years before it discontinued its efforts.)
Why did the CAS Board stop its efforts at updating 1973 values to reflect modern reality? It its own words—
After reviewing the comments and regulatory history of CAS 403, the CAS Board believes that it would be prudent to discontinue the review of the CAS 403 three factor formula operating revenue thresholds at this time. No evidence has been presented to the Board that the current thresholds are creating an inequity, or that adjusting the thresholds would substantially change the outcome, i.e., the pool of contractors required to use the three factor formula to allocate residual home office expenses to the segments would not change significantly.
Well, there you go. It is Mr. Gordon’s assessment that it would be “prudent” to stop efforts relating to CAS 403 because nobody presented any evidence that the revenue thresholds should be updated. The fact that the CAS Board never asked for that evidence, or failed to look for it, was kind of glossed-over, don’t you think.
So, while important CAS issues such as those above, as well as the valuation of ID/IQ contract types for CAS applicability purposes or the definition of “increased costs in the aggregate,” have been abandoned or unaddressed by the CAS Board he chaired, Mr. Gordon has declared victory with respect to training the Federal government’s acquisition workforce.
We wish he had focused more on the CAS Board, and been able to declare “mission accomplished” with respect to that other area of his responsibility.
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Proposed Rule on Proposal Adequacy
You have to give us some credit on this one. Sure, our lead time was measured in hours and not days or weeks, but at least we were in front of the curve . Our readers did get some measure of “heads-up”. And it would have been more, too, but the SoCal windstorm took out the power at our webmaster’s lair, and so publication was delayed for a couple of days until the electricity was restored. But we were on this like a drug-sniffing K-9 canine prowling an opium den.
(The foregoing is a long-winded and clearly defensive introduction to the very recently published proposed DFARS rule on proposal adequacy, found right here.)
As we mentioned in our previous article (link found in the long-winded and clearly defensive introductory paragraph, above), we start off with the proposition that this rule is unnecessary, overly bureaucratic, and possibly un-American. DCAA already has such a checklist and has been using it to avoid auditing contractor proposals for some time. Moreover (and as we noted in our previous article), though the DCAA proposal adequacy checklist expressly applies only to contractor proposals for which certified cost or pricing data are being submitted, DCAA has told its auditors that the checklist is may be good “guidance” to help an auditor “reach an opinion on the adequacy of the [contractor’s] proposal.” And so we’ve seen proposal after proposal rejected for audit as being inadequate, even though TINA, the requirements of FAR Table 15-2, and the proposal adequacy checklist itself are clearly and expressly Not Applicable.
But try as we might, we can’t get away from the fact that it is the Contracting Officer’s responsibility to determine whether the contractor’s proposal is adequate to negotiate a fair and reasonable price—before requesting the “field pricing assistance” of DCAA auditors. (See FAR 15.404-2.) So while DCAA may need a checklist to determine whether a proposal is adequate for audit, we have to reluctantly agree that it may be reasonable for DOD to issue to its Contracting Officers a checklist to assist them in determining whether a proposal is adequate for negotiation.
(You’d think that any warranted CO would be able to make that determination on his or her own, and that any CO who couldn’t make the right call in that particular area might be relatively unfit to have received the warrant in the first place, but perhaps we digress.)
So let’s now turn to the substance of the proposed DFARS rule and see if it is focused on assisting Contracting Officers in determining whether a contractor proposal is adequate for negotiating a fair and reasonable price.
The substance of the proposed rule is to create a solicitation clause (252.215-70XX) that imposes a “proposal adequacy checklist” for contractors to submit, along with their proposals, when solicitations “require the submission of certified cost or pricing data, if the contracting officer chooses to use the provision.” We note that the proposed DFARS language states, “When the solicitation requires the submission of certified cost and pricing data, the contracting officer should include 252.215–70XX, Proposal Adequacy Checklist, in the solicitation.” So inclusion of the provision clearly is not mandatory; nonetheless, you should expect to see it frequently, since Contracting Officers who opt not to include it may have to justify their decision.
Though the Regulatory Flexibility Act analysis that accompanies the proposed rule states that only 905 contract actions per year will qualify for the new proposal adequacy checklist, we are more than a little skeptical of that number. If the entire defense industrial base were only submitting 905 TINA-compliant proposals each year, then DCAA could kick back and read the newspaper. Instead, DCAA reports that it is so bogged-down in auditing “forward priced proposals” that it needs to limit its audits only to those that exceed certain dollar thresholds. In fact, in its most recent Semi-Annual report to Congress, the DOD Inspector General reported that DCAA had issued 1,143 audit reports on contractor forward pricing proposals. (See Appendix D.) And that was over a 6-month period (not a full year), and after the dollar thresholds noted above had already been implemented! So while not all of those proposals would be subject to TINA, we believe the majority of them would be. So quite clearly, we think that the proposed proposal adequacy will be applied to far more than the 905 instances DOD has stated would be the case.
The proposal adequacy checklist itself is not very novel. It you look at the DCAA’s proposal adequacy checklist you’ll find the source of the majority of the 47 proposed points of proposal adequacy. Other items include stuff pulled from FAR 2.101 (e.g., definition of commercial item) or from other FAR Parts. It’s quite a bit redundant with the requirements of FAR Table 15-2 in that (by our count) 30 of the 47 points of adequacy simply reiterate requirements from that Table. It would be much simpler, and provide Contracting Officers with exactly the same information, if those 30 points were collapsed into one single point that said, “Contractor certifies that it complies with all applicable requirements of FAR Table 15-2.”
Contractors subject to TINA, and wishing to successfully negotiate a contract award with DOD, should already be prepared to comply with the requirements of FAR Table 15-2. We don’t see this proposed checklist as adding very much (if any) value to such contractors. So why does DOD think it’s even necessary?
Well, according to the comments accompanying the proposed rule—
This rule will implement one of DoD’s Better Buying Power initiatives. The objective of the rule is to ensure that offerors submit thorough, accurate, and complete proposals. By completing the checklist, offerors will be able to self validate the adequacy of their proposals.
So there you are. DOD is implementing this proposed rule to help its contractors check, on their own, that their proposals are “adequate”. We should all say “thanks” to the DAR Council and just go about our business.
Hold it! Not so fast.
We told you about DOD’s “better buying power” initiative in a series of blog posts, including (for example) this article. As we told you, DOD has been pursuing two distinct lines of attack: (1) the drive to reduce waste, bureaucracy, and inefficiency within the Pentagon (AKA the “efficiency” attack), and (2) the drive to reduce the costs of goods and services by focusing on reducing contract prices (AKA the “affordability” attack). We reviewed (once again), the September 2010 Memo and its 23 “principal actions”. The funny thing was that we couldn’t find anything in that Memo about the adequacy of contractors’ proposals. Sure, you could say this effort falls under the general rubric of “reduce non-productive processes and bureaucracy”—and maybe it does. But we didn’t see anything under that heading that caused us to think this proposed rule was contemplated by the Better Buying Power initiative.
To the contrary—under the heading “reduce non-productive processes and bureaucracy” we found this objective:
Reduce non-value-added overhead imposed on industry. Industry has its own internal unproductive processes which add to project costs, but these are in some part a reflection of the requirements which the government imposes. A great number of the inputs I received from industry were directed at what was viewed as excessive overhead expenses based solely on non-value-added mandates and reporting requirements which may have been relevant at some point in time, but have little relevance in the world in which we now find ourselves. In order to identify and reduce these costly requirements, I am directing the Director of Industrial Policy, with support from DPAP, to more fully survey our industrial base to identify, prioritize, and recommend a path forward to unwind duplicative and overly rigorous requirements that add to costs, but do not add to quality of product or timeliness of delivery. As we remove these requirements, I will expect a decline in the overhead charged to the Department by our industrial base that reflects these reduced costs.
(Italics in original.)
So, rather than impose an additional solicitation provision and checklist on contractors, the Better Buying Power initiative actually directed the exact opposite take place.
Contractors already know—or should know—how to submit adequate proposals. If they can’t submit adequate proposals, then they shouldn’t expect to win any work from DOD. Instead of this ill-begotten piece of bureaucratic misadventure, what is needed is a checklist for DOD Contracting Officers to use in determining whether a proposal meets the Section L pricing instructions of the solicitation, whether it is adequate as submitted to commence negotiations leading to a fair and reasonable price, and/or whether field pricing assistance (including DCAA audit) is necessary.
Contractors don’t need this kind of assistance from the DAR Council. Instead, DOD needs to be assisting its Contracting Officers in being more efficient. That will be the theme of the comments that Apogee Consulting, Inc. intends to submit to the DAR Council.
What will you be saying?
More Details Emerge on Administration of Contractor Business Systems Rule
 As our readers know, we have been following the new DFARS rule on contractor business systems since the beginning, even going so far as to submit comments to the DAR Council. The first draft rule was a disaster. The second iteration—issued as an interim rule—was better, though (in our view) far from perfect. Subsequently, DCMA put out policy guidance that gave us some hope administration of the new rule wouldn’t be as problematic as it could be.
We continue to scrutinize implementation of the new rule, sensitive in particular to how DCMA uses its new authority (authority which it has always had, in our view) to reduce payments to contractors when DCAA auditors and/or DCMA functional specialists report that business systems contain one or more “significant deficiencies” that render the business systems “inadequate”. A couple of new developments have come to our attention, and we want to share them with you.
First, a recent industry/DPAP “cross-talk” touched on implementation of the new rule. The following notes report that discussion—
It was confirmed by DPAP that system deficiencies will be considered to be site specific if the system functions at specific sites, not enterprise–wide. If a system operates only within a certain segment of a company, the same limits would apply. The deficiency would incur consequences company–wide only when the system is used company-wide. … The part of the company using the deficient system will reap whatever consequences might be imposed.
So what that tells us is that any business system that is segment-specific (i.e., one whose policies, procedures and practices are limited solely to one segment) that is found to inadequate will not automatically “infect” the other company segments. On the other hand, enterprise-wide business systems (e.g., enterprise-wide accounting systems or earned value management systems) that are found to be inadequate may well trigger withholds on all covered contracts across the enterprise, even if the deficiencies are limited to non-compliant practices of only one segment.
Companies performing risk assessments on potential issues with their six business systems might want to take that aspect into account. Enterprise-wide systems potentially carry with them larger financial penalties (in terms of reduced cash flow), so we would advise that they be targeted first when performing internal compliance checks and employee training.
And if you are a contractor subject to the new DFARS contractor business systems rule, and you are not performing any risk assessments, or are not performing internal compliance checks, or are not ensuring that employees are thoroughly trained in command media and practices associated with your business systems … well, we don’t have many nice things to say about you. It might be fairly said that you’re either blindly optimistic, or more likely recklessly negligent.
Moving on, the second new development that’s come to our attention is that the Navy and the cognizant Administrative Contracting Officer (ACO) reportedly have become the first to actually reduce contractor payments under the new rule. And the winner in the race to be the first contractor to have a business system found to be inadequate and, as a result, have payments reduced is …. Huntington Ingalls Industries!
Readers may remember that about eighteen months ago (March, 2010) Northrop Grumman spun-off its shipbuilding business and created Huntington Ingalls. Since that time, the new entity has announced facility closures and layoffs (both voluntary and involuntary), all while reporting lackluster financial results. So the news that the entity was the first to have contract payments reduced under the authority of the new business systems rule might be seen as the continuation of a series of not-good news.
On November 9, 2011, InsideDefense.com (subscription required) reported that—
The Navy will penalize shipbuilder Huntington Ingalls Industries for management problems by withholding millions of dollars under new Pentagon rules that crack down on contractors' deficient business systems. … The Navy notified the shipbuilder in late October that it would withhold 5 percent of progress payments for the $698 million contract awarded in September for the construction of an Arleigh Burke-class destroyer (DDG-114) at Ingalls, Naval Sea Systems Command spokesman Chris Johnson told Inside the Pentagon. The money is being withheld in accordance with new DOD acquisition rules on contractor business systems. …
The DDG-114 award is the first contract awarded to Ingalls that includes the new clause, which does not necessarily require the government to withhold payments, even if the contractor has a history of management deficiencies. First, the contractor is "given due process," said Noble. Before withholding money, the department must initially determine there is a problem and give the contractor an opportunity to respond. After evaluating the response, a contracting officer makes a final decision about withholding payments.
‘No withholding of payments occurs until a final determination is made that a significant deficiency exists,’ said Navy spokeswoman Pat Dolan. Huntington-Ingalls Industries went through that process, but did not pass muster. In June, the administrative contracting office initially disapproved of Ingalls' earned value management system, Dolan said. … The Defense Contract Management Agency determined this summer that Ingalls was violating 19 of the 32 rules.
The agency also reaffirmed this summer that Huntington-Ingalls Industries' shipyard in Newport News, VA, the sole builder of U.S. aircraft carriers, was breaking 16 [EVMS] rules.
That story was followed closely by this one in Aviation Week & Space Technology, in which it reported—
The Naval Sea Systems Command said 5 percent of progress payments were being withheld on a $697.6 million contract awarded in September for a new Arleigh Burke-class destroyer.
The Navy did not specify the sum being held back. It cited deficiencies in the company’s ‘Earned Value Management System,’ … referring to a federal contracting performance yardstick.
The penalty amounted to millions of dollars under new Defense Department rules aimed at boosting contractors’ performance, said Inside the Pentagon, a trade publication that was the first to report the sanction.
The Defense Contract Management Agency found deficiencies representing ‘systemic and material internal control weaknesses’ under 19 of the 32 ‘guidelines,’ Jacqueline Noble, an agency spokeswoman, told Reuters. …
The problems at Huntington Ingalls crossed each of the five overall areas at issue—Organization; Planning, Scheduling, and Budgeting; Accounting Considerations; Analysis and Management Reports; and Revisions and Data Maintenance, Noble said in an emailed reply.
For its part, the company put a good face on its problems, saying that it did not expect the payment withholds to “impact its financial outlook,” AW&ST reported.
As we stated above, we think this new DFARS rule is going to be problematic for defense contractors. We are advising our clients to make an honest and forthright assessment of their six business systems, to identify control gaps and noncompliant practices. From there, we advise our clients to remediate control gaps immediately, to revisit and enhance command media. Affected employees should be thoroughly trained in each system’s policies, procedures, and practices. Finally, frequent internal compliance reviews should check and double-check compliance with system controls. In our view, that’s not overkill; that’s a rational response to the increased financial risk associated with systems that are determined to be inadequate.
Sure, it costs a lot to execute our recommended approach. But as Huntington Ingalls found out, investing in assessing and remediating business systems (and other internal controls) is always cheaper than experiencing payment withholds … or fines, penalties and/or legal judgments.
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We have called them the “DOD Oversight Wars” and there have been episodic outbreaks of bureaucratic and political attacks for almost four years. GAO attacks DCAA; DCAA attacks DCMA; the DOD IG attacks both DCAA and DCMA; etc. You get the picture. Add-in the proxy attack dog, The Commission on Wartime Contracting, and various House and Senate hearings—with associated politician-generated soundbites, of course—and an observer might easily get the idea that the Federal government was distracted by defense-related internecine warfare. The DOD Oversight Wars are not only a symptom of the petty squabbling and lack of policy leadership to be found within today’s defense acquisition and oversight satrapies, they are also a primary driver of increased contractor overhead costs and program execution inefficiencies.
