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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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.
DOD States Contractor Profit Not a Target, While Targeting Contractor Profit
Okay, this one is going to touch on a few seemingly unrelated topics. Bear with us and we’ll try to tie it all together by the end.Let’s start with the issuance of a DOD policy memo, on November 10, 2011, by Shay Assad (formerly Director, Defense Procurement and Acquisition Policy, and now Director, Defense Pricing, under the Under Secretary of Defense, Acquisition, Technology and Logistics). Mr. Assad’s memo was entitled, “Direct and Indirect Charging of Contractor Proposal Preparation and Negotiation Support Costs.” (You can read the memo here.)
We don’t think that the substance of the memo is particularly controversial. It offered very little novelty in its interpretation of existing regulations. Its guidance was (in our view) entirely consistent with the requirements of the B&P/IR&D cost principle at 31.205-18. It was consistent with the requirements of CAS 402, Interpretation No. 1 as we understand them. It was consistent with the requirements of CAS 420 as we understand them. In most circumstances, the memo would be unremarkable and we’d let it pass without comment.
What makes Mr. Assad’s memo worth commenting on is its expressed bias against the direct-charging of proposal preparation costs. The memo stated—
As a matter of policy, contracting officers should minimize the situations where a contractor will be required to prepare proposals for new requirements or to definitize unpriced contractual actions. … If a contracting officer requires a proposal for a follow-on contract or for new requirements, or determines it is necessary to award undefinitized contractual actions, the Department will often be placed in the position of paying for the proposal and negotiation costs on a reimbursable basis with little or no competitive control over the costs incurred. Contracting officers should avoid placing the Government in that position.
Well, isn’t that special. The obvious problem with that policy position, of course, is that the proposal preparation costs that are not charged directly to contracts have to be charged somewhere else. If not direct, then they must be indirect. Thus, if the policy position in the memo is adhered to, then proposal prep costs that might have been legitimate direct contract charges will instead be accumulated in indirect B&P projects, to be allocated back to contracts on the same base as is used for allocating G&A expenses. Instead of being direct contract costs that actually absorb G&A, they will essentially add to contractors’ G&A expense pools. In other words, the expressed bias against direct-charging of proposal prep costs will inevitably lead to increases in contractors’ indirect costs—specifically, their G&A expense indirect cost rates.
But perhaps Mr. Assad was less worried about indirect costs than he was about direct contract costs. If so, that would be a 180 degree turn from DOD’s traditional position, which was that contract cost performance reports and similar Earned Value Management information provided insight into individual contract costs, whereas indirect rates were largely a mystery, denoted by rates/percentages and guarded by DCAA auditors against the prying eyes of DCMA contracting officers.
If we’re correct in our assessment, then Mr. Assad’s implied policy position—that the DOD has more visibility and control regarding contractors’ overhead costs than it does regarding contractors’ direct costs—would not be inconsistent with past positions Mr. Assad has taken. In fact, Mr. Assad has, in the past, promised increased DOD scrutiny on contractor indirect costs. For example, in June, 2011, when Mr. Assad departed his previous post to accept his current position, we reported his remarks on contractor indirect costs, which, at the time, we thought portended some important changes in DCMA focus. Among other sources, our article linked to an Aviation Week & Space Technology story that included the following Assad quote---
‘The reality is we need to step up our game across the board, and so that’s what we’re doing,’ Assad told reporters. He said unlike profit margins, overhead costs would be fair game. ‘That’s cost. How do we get that out?’ …
So it’s quite possible that Mr. Assad feels his new DCMA pricing team can better control indirect costs than they can direct costs. We are skeptical of DCMA success in that quest; but it is certainly a quest that can be reasonably pursued by Mr. Assad’s team.Assisting Mr. Assad on his quest to rein-in contractor overhead (and presumably other indirect costs) will be a revitalized and repurposed acquisition workforce, according to November 16, 2011, report on Federal News Radio. The report stated—
The Defense Department says it's taking several new steps designed to drive toward better business deals. They involve not only rebuilding the acquisition workforce, but also making sure that workforce has the tools to make good decisions. … Shay Assad, the Pentagon's director of Defense pricing, said the steps are a ‘revolutionary approach’ to making sure DoD's acquisition professionals get much more skilled in understanding the business deals they make with industry. They center on giving acquisition staff a better view of what's happening across DoD itself. …
The changes will be led by the Defense Contract Management Agency, the DoD entity that handles administration of contracts, Assad told attendees at a conference of the Government Contract Management Conference in Bethesda, Md.
Assad said DoD is starting by bringing all of DCMA's administrative contracting officers (ACOs) back into one place after a period of decentralization.
‘We're going to have a uniform approach to how we deal with our peers in industry,’ he said. ‘That change is taking place right now. It should lead to a more consistent understanding of what the government's position is. It should lead to an improved ability for forward pricing rate agreements to come about. We're establishing a fundamental position in the department that says that these corporate ACOs who are responsible for rates will be the contracting officers' central repository of information with regard to rates.’
Second, DoD is piloting a new system called the Contractor Business Analysis Repository (CBAR). The tool is designed to give contracting officers much more insight into DoD's past and ongoing relationships with a particular company they may be dealing with.
‘They'll be able to log in and get access to every business deal over $10 million with that company,’ Assad said. ‘The ability for contracting officers to have much more awareness of what's happening throughout this very large organization will be provided to them almost instantaneously and in real time. In addition to that, they'll have access to all of the rates that have been proposed, what DCMA's position has been and what the contactor's position has been over time. Our contractors are really excited about having this kind of capability.’ …
A third initiative is tied to the regrowing of DoD's acquisition workforce. Assad said DCMA has hired 300 price analysts and engineers for one specific purpose, to populate a new effort called ICAT — or Integrated Contractor Analysis Teams. The groups will be able to offer immediate technical and pricing assistance to contracting officers. Similarly, new regional pricing teams will be stood up to help with smaller contracting projects. They'll focus on contracts that are smaller than $100 million and be available as a resource to help contracting officers who need expertise in figuring out pricing. …
In a future blog article, we will discuss a recent GAO report assessing DOD’s efforts to enhance its acquisition workforce. So stay tuned for that.One additional point from the Assad memo on proposal prep costs. Those who read the entire memo (and if you didn’t read it, shame on you) would have noticed a couple of sentences at the very end, which said—
… we will soon be issuing a proposed DFARS rule (Case No. 2011-D042), that will provide a check-list to help gauge the adequacy of a contractor proposal. Such controls like this checklist, once finalized, will help prevent the Department from being billed for a substandard proposal package that will not adequately support negotiation of a reasonable price.
That’s an interesting comment on a number of levels. First, we note that DCAA already has such a checklist. (It’s called the “Forward Pricing Adequacy Checklist” and is available at the DCAA website). So either the current DCAA checklist is inadequate—or perhaps it’s so useful that the DAR Council thinks it should be given the authority of a regulation! The introduction to the DCAA proposal adequacy checklist includes the following statement—
When the proposal is based on information other than certified cost or pricing data, the contracting officer is responsible for obtaining information that is adequate for evaluating price reasonableness. Inadequacies exist when the offeror does not comply with the contracting officer’s requirements. The following criteria, while specifically not applicable to information other than certified cost or pricing data, may provide a guideline to the auditor in reaching an opinion as to the adequacy of the proposal (CAM 9-208). Consideration should also be given to any specific requirements in the request for proposal (RFP).
We highlighted in italics an interesting sentence; to wit, that DCAA admits its proposal adequacy checklist is not applicable when TINA applies to a proposal…but auditors should feel free to use on non-qualifying proposals anyway---since it may be a useful “guideline” for auditors.
Yeah, we know how that’s going to turn-out, don’t we?
Further, we note that DCAA apparently is misinterpreting the requirements of FAR 15.404-2 when it defines an inadequate proposal one that “does not comply with the contracting officer’s requirements.” In our view, a fair reading of that FAR rule would be that the contracting officer requests “field pricing assistance” (which includes DCAA audit of the contractor’s cost proposal) only when that contracting officer concludes that the contractor proposal, as submitted, is “inadequate to determine a fair and reasonable price.” Thus, by regulatory rule, DCAA would be involved in a cost proposal audit only when the offeror’s proposal had been determined to be inadequate by the contracting officer. In other words, every single proposal that DCAA audited would be, by definition, inadequate under its definition of adequacy.
Second—and as we’ve opined before—the recent emphasis on contractor proposal adequacy is misplaced, or perhaps we should say that it places focus on a symptom rather than the real problem.
... we wonder if the foregoing Air Force and DCAA direction might not be avoiding addressing the real problem—which is insufficient identification of Government requirements, and subsequent changes to those requirements—which prevents contractors from submitting timely and comprehensive proposals. (See the GAO reports linked above, which show the lack of defined requirements is a much a problem as any lack of cost or pricing data.) Focusing on enforcing timely contractor provision of requested data to support fact-finding and negotiations seems to be a fundamentally misplaced management emphasis...
So we wonder just how important to DOD buying efficiency this soon-to-be-proposed DFARS rule really will be, and how much money DOD really will save from requiring, by DFARS rule, that contractor proposals be “adequate”. Keep your eyes on that DFARS Case and, when it’s issued, then see if you agree with us that it’s likely to turn-out to be a cure in search of a disease.
Mr. Assad has emphasized several times that he’s not looking to impact contractor profitability—just their costs. He’s fine with contractors making a reasonable profit (as he should be, given that it’s official Government policy). He reiterated this position again, quite recently, and the MSM and others who follow the defense industry picked-up on his words and reported them (again) as if they were some kind of promise of safe-harbor in the upcoming storm of sequestered DOD budgets.
Here’s one example of such “gosh, what wonderful news!” reporting—
Even with the Pentagon looking to make widespread cuts and improve efficiency, profitability is not a target and it may increase, the Defense Department's director of procurement and acquisition policy told an audience of investors Wednesday.
Speaking at the Credit Suisse 2011 Aerospace & Defense Conference, Shay Assad said that the Pentagon is concerned with cost reduction, not margin reduction, and that he would be surprised if profitability went down even as spending is decreased.
‘It wouldn't bother us at all if operating margins go up, so long as we're paying less,’ he said. ‘We want to spend 90 and have them make 15, we don't want to spend 105 and have them make 15.’
Despite Mr. Assad’s assertions, it’s become apparent that not everybody in DOD shares his point of view. In April, 2011, DPAP issued policy guidance discussing use of Performance-Based Payments (PBPs). We wrote about our disappointment with the DOD policy position here. Readers should remember that Mr. Assad was still Director of DPAP when this particular piece of pathetic policy was issued. The policy memo asserted that contractors should offer the DOD “consideration” in return for permission to use PBPs—conveniently forgetting that previous DOD policy acknowledged that consideration had already been provided through DOD’s lower administrative costs. In any case, the policy memo also directed contracting officers to utilize an Excel-based spreadsheet that determined “a win-win price that equitably accounts for the cost, benefits and potential risk associated with PBPs.” That tool can be found at the DPAP website, right here.
The defense industrial base was, quite rightly, concerned with DOD’s new PBP policy. The Aerospace Industries Association (AIA) went so far as to send a letter to DPAP in September, 2011, expressing its concerns. As one commenter summarized AIA’s concerns as follows—
Basically the [DPAP cash flow] tool compares the net present values of the cash flows under progress payments and those with performance based payments. The aim is to assure that the discounted outlay is not higher under performance based payments than under progress payments. The discount rate for the government cash flows (out) differs from the discount rate used for the contractors’ cash flows. The tool splits that delta (arriving at the win-win) and calculates a rate of profit that achieves that win-win outlay. The contracting community’s major concern has been the discount rate selected and the fact that the tool appears to fly in the face of the preference for performance based payments by making them less attractive.
Clearly, that commenter was far more diplomatic that we have been on this topic.On November 10, 2011, AIA (and other industry associations) met with a DPAP representative to discuss industry’s concerns. In that meeting, attendees (and now our readers) learned the following—
- DFARS Case 2011-D045 will reference the cash flow tool and include a cost limitation clause, and guidance for use of the tool. Why this needs to be a DFARS rule and not a revision to DOD’s PGI remains to be seen.
- The cost limitation contract clause noted above will limit the value of PBPs to the contractor’s actual incurred costs.
- DOD does not like PBPs and feels that they provide no incentive for on-schedule performance.
- DOD does not intend that PBPs be used with competitive awards, because of the expense and delay associated with conducting two negotiations (one for customary progress payments and the other for the price difference associated with use of PBPs).
- DOD believes that use of PBPs requires additional reviews prior to payment, whereas those reviews need not be present to process customary progress payments.
- DOD intends that contractors receive a lower profit rate when PBPs are utilized, notwithstanding the current Weighted Guidelines direction that PBPs are riskier to the contractor than are progress payments.
We are going to gloss-over the level of ignorance and wrong-headedness displayed by the DPAP representative in the foregoing. We are going to gloss-over the fact that progress payments require adequate contractor accounting systems and periodic DCAA audits. We are going to gloss-over the fact that PBPs were imposed by Congress (via FASA) and DOD is clearly violating the will of the Legislative Branch in its recent actions. No, we’re simply going to note that, while Mr. Assad is assuring industry and media that DOD is looking to reduce contractor cost— but not contractor profits—the words and deeds of his former Directorate demonstrate otherwise.
So let’s wrap-up this perhaps overly long survey of recent DOD activities that impact its industrial base. What have we learned?
- DOD is focused on reducing contractors’ indirect costs, while at the same time it issues policy guidance that will tend to increase contractor’s indirect cost.
- DOD blames contractors for inadequate proposals, while failing to address its own shortcomings that create those inadequate proposals.
- DOD is reorganizing and hiring-up, to provide more opportunities to drive down contractor costs.
- DOD is actively seeking to overturn the will of Congress and, through its actions, reduce contractor profits while creating more workload for DCAA.
And if you don’t care for what you’ve learned, you can point to Mr. Assad as the instigator of most of it.
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