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Tuesday, September 28, 2010

First, acquire the skills and the skulls

DoD needs robust acquisition work force
The Pentagon's new contracting rules call for more competition, increased emphasis on defining requirements, setting firm prices, implementing smarter incentives for cutting costs and avoiding overruns, and better scrutiny of procurements.

There potentially is a big payoff to Pentagon acquisition chief Ashton Carter's reform, outlined in a Sept. 14 memo, of how the Defense Department goes about spending $400 billion a year in goods and services.

The most important next step for Carter is to ensure the department's acquisition work force has the skills, numbers and understanding of the new rules to implement the reforms.

The reforms will add a bigger and more complex workload upon contracting staffs. They will need to: coordinate more with program managers early on to better define requirements; increase competition among vendors; award more contracts to small businesses; do more market research to set pricing targets; and negotiate contracts that use incentives more effectively to minimize risk and control costs.

This requires robust training and development, clear guidance for the acquisition work force and far more acquisition professionals to meet the increased workload.

staff training must be updated and adequate resources must be directed toward developing a work force that fosters competition and demands cost efficiencies. Nothing is more critical as the department aims to trim and redirect billions of dollars in overhead costs.

it will be vital to provide guidance to the work force on how to execute the new rules while allowing flexibility to make decisions that best promote competition, innovation and efficiencies.

Carter's plan could truly reform Defense Department procurement. But getting these next steps right, and close monitoring of how these reforms are playing out, will be critical to success.

Sunday, September 19, 2010

Procurement controversies -- Pennsylvania, USA

Up for bid: Pa. state contract process needs overhaul
Every political candidate The Patriot-News has interviewed this year has vowed to do one thing above all: Cut spending.

A prime area for reducing costs that the next governor and state Legislature should look at is state contracts.

As Patriot-News writer Jan Murphy reported last month, the Department of General Services awarded a contract to provide criminal background checks of teachers, mortgage brokers and foster parents to Cogent Systems, the firm that had been doing the services for the last few years.

This didn’t sound that unusual until we learned that another bidder, L-1, bid $35 million less than Cogent to perform the same service.

DGS disqualified L-1 in the final round of bidding on the grounds the firm was not financially viable, something the company disputes. L-1 provides services for PennDOT and the state attorney general’s office, among other government agencies. It’s hard not to believe something is awry in this bid.

A contract to upgrade severely outdated computer systems at the Department of Revenue went to Accenture this summer. Another bidder, Fast Enterprises, recently filed a lawsuit alleging the state ignored its $12.4 million lower bid and stifled competition.

Just this week it came to light that the group tracking people concerned about Marcellus Shale drilling as if they were major Homeland Security threats was hired on a no-bid state contract.

A Pa. Emergency Management Agency spokeswoman said “there was no other company at the time who could fulfill the requirements.” Yet the group hired, the Institute of Terrorism Research & Response, is a nonprofit that was paid more than $100,000 when there’s a special state police unit that’s supposed to do this kind of work.

These latest red flags come only a year after a major report released by Auditor General Jack Wagner’s office pointed out improper and possibly biased bid processes at state agencies. Wagner’s report focused mainly on $592 million worth of no-bid contracts awarded to Deloitte Consulting LLP and made 37 recommendations for improvement.

Gov. Ed Rendell has too often lacked adequate justification for no-bid contracts in his administration. For instance, when Wagner’s audit came out last year he told the media, “When somebody is performing well, you want to reward that performance.”

The Legislature has a role to play in cleaning up state bidding as well.

Rep. Glen Grell, R-Hampden Twp., is one of the authors of legislation calling for such basics in the bidding process as transparency, public review of contracts and no “pay to play.” These reforms should be no-brainers, but, unfortunately, we seem to need to put them into law. How many more red flags will it take before there’s change?

In this “do more with less” era, saving money on contracts through a truly competitive process should be the norm.

Planning saves

Planning for procurement is one of the central policies of good procurement, along with its corollary requirement to first make an accurate assessment of government need. Construction contractors in Canada make that point in this article.

Report calls for culture change in procurement processes
“There needs to be more dialogue with government and private sector suppliers so government can become more open to how a supplier addresses a government’s need. Also, suppliers need to become more familiar with the rules and regulations that necessarily control government expenditure,” said Kevin McGuinness, co-author of The Price Implications of Government Contracting Practices in the GTHA (Greater Toronto-Hamilton Area).

“We all want to government to operate as efficiently as it can. I do not know anymore who would argue against that.”

Andy Manahan, executive director of RCCAO, said the report looks at how common government and public-sector procurement practices can lead to reduced competition and higher project prices.

Many government procurement representatives are involved in multiple files which “greatly exceeds the number that a private sector buyer would be expected to administer,” the report concluded.

The report provided an example of a Southern Ontario municipality that encountered a $5.6-million cost overrun on a stadium project originally budgeted for $39 million. The report noted that the municipality had placed unrealistic time frames on the project, failed to consult properly before taking the contract to market and failed to conduct proper site testing.

Items such as a required stormwater pond not initially considered in the application, an underestimation in required square footage in the design and an aggressive construction schedule that did not factor in overtime to meet completion all drove up costs.

Procurement barriers such as unrealistic time requirements, contract extension rights or qualification on volume work will cause contractors to adjust their prices for any unattractive contract features, noted McGuinness.

Stronger contractor candidates will also generally refuse to bid work with exceptional risk.
I would note that when the procurement is instigated by special legislation, such as the Guam legislation for the JFK High School project, it is essential that the legislators understand this need and defer to experts. Howling editorials and pumped up populism may make the planning process difficult, but cutting corners for pure political purposes is an expensive and ultimately less popular exercise.

Friday, September 17, 2010

Affordability

One of the first principles of sound procurement is to maximize, to the fullest extent practicable, the purchasing value of public funds. As noted earlier, there is a slight tension between this principle and the principle of competition, but these twin goals are not incompatible.

The US Department of Defense is getting back in tune with the price/value meaning of the "affordability" principle.

The Party Is Over - Gates Unveils New Buying Rules
What Defense Secretary Robert Gates unveiled today is basically a compilation of standard common-sense procurement practices. Some of these policies have been in existence for decades and, had they been followed properly during the past 10 years, probably would have already saved far more than $100 billion.

Systems will be designed based on affordability rather than “desire or appetite,” Gates said.

Another tenet in the new contracting blueprint is that program cost estimates will have to be calculated based on what a systems “should” cost, not necessarily what it “will” cost. That may sound perplexing, but it makes sense considering the usual practice at the Pentagon to boost the estimated costs of a system because it was originally underpriced, or because mismanagement led to cost increases.

Efficiencies also will be sought through the use of multiyear contracts that will let companies benefit from economies of scale and lower prices from suppliers. Another way to generate savings will be through increased competition, said Gates.

For industry, the most worrisome item in the plan is changes in the way contractors are compensated. A system of almost guaranteed “award fees” will be replaced by a regime that rewards performance and efficiency, according to Gates.

An explosion in contract spending since 9/11 has created a bloated system where productivity is a foreign concept and every problem is fixed by throwing more money at it, Gates said at a news conference.

Under the new guidelines, weapons programs woud be held to strict “affordability targets.” A program manager will set such goals at the beginning of the project and the target cannot be revised upward without approval from the Pentagon’s acquisition executive. This will “prevent us from embarking on contracts that are not affordable,” said Gates.

Ashton B. Carter, undersecretary of defense for acquisition, technology and logistics, said spending on service contracts sprang out of control after 9/11 without proper oversight. Organizations received loads of money to hire contractors and did not have the expertise for how to manage these projects. As a result, hundreds of billions of dollars have been handled by “amateurs” who needed work done and were not particularly concerned about efficiency or return-on-investment, Carter noted. “We need to help them with guidance, templates, market research” so they can acquire the same services but at less cost.

Simply because something is fairly priced doesn't make it a reasonable expense. Pricing must be both fair and reasonable: in Mr. Gates' words, "affordable".

Sunday, September 5, 2010

Three for the road

A quick look at procurement issues in Trinidad & Tobago, Texas and the UK.

Duties of fairness (Trinidad & Tobago)
Think of the word procurement, two things come to mind.

The first is the Commission of Inquiry into the Construction Sector. It has taught us more than anything that shortcuts don’t work – unless, of course, it’s an abbreviated but approved version of a lengthier process.

The other is Margaret Rose. At that very inquiry, she represented former Minister of Trade Dr Keith Rowley. But beyond the lingering image of her cross-examining members of the Urban Development Company of Trinidad and Tobago and Government ministers on her client’s behalf, Rose’s association with proper practice and procedure has more to do with understanding that law.

“When I went to that Commission of Inquiry…I was asked to advise the Government and asked by the Commission on all these issues of procurement fraud, bid rigging and conspiracies…all of which I was not prepared,” she said.

Her legal education did not prepare her for that either since there were no courses for procurement law or Government tendering.

But she did her research, including a short course at York University’s Osgoode Hall Law School in Canada and attending conferences abroad, and realised how much this country was missing.

She noted globally, post 1990, the procurement function was no longer viewed as a “back office” purchasing administrative function. Even the multi-lateral bodies such as the World Trade Organisation, the United Nations and the European Union started putting procurement rules and conditions in place.

Her passion for this area allowed her to join forces with two other professionals to form the Caribbean Procurement Institute. In December 2006, Jamaican banker Woodrow Whitely, Independent Senator Helen Drayton and Rose gave birth to the organisation, which serves as adviser and consultant on the procurement process.

FORMER SENIOR EMPLOYEE WITH U.S. MILITARY CONTRACTOR PLEADS GUILTY TO BRIBERY SCHEME RELATED TO CONTRACTS IN SUPPORT OF IRAQ WAR (Texas)
A former senior employee of a U.S. military contractor pleaded guilty today to conspiracy to pay $360,000 in bribes to U.S. Army contracting officials stationed at a U.S. military base in Kuwait, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division.

According to court documents filed today in U.S. District Court for the Southern District of Texas, Dorothy Ellis, 53, of Texas City, Texas, was employed by former U.S. military contractor Terry Hall. As Hall’s most senior employee, Ellis’s responsibilities included serving as the liaison between Hall and U.S. Army contracting officials stationed at Camp Arifjan, a U.S. military base in Kuwait.

From the spring of 2004 through November 2007, Hall operated and had an interest in several companies, including Freedom Consulting and Catering Co. (FCC) and Total Government Allegiance (TGA). At various times during this period, these companies provided goods and services to the U.S. Department of Defense (DoD) and its components based on a blanket purchase agreement (BPA) to deliver bottled water and a contract to construct a security fence in Kuwait and elsewhere.

According to court documents, Hall obtained the calls made under the bottled water BPA and fence contract by bribing certain U.S. Army contracting officers, including former Majors James Momon and Christopher Murray. Hall, assisted by Ellis and Hall’s business partner, paid Momon approximately $330,000 and paid Murray approximately $30,000. In exchange for these bribe payments, from January 2006 through May 2006, Momon arranged for the DoD to pay Hall’s companies more than $6.4 million through the bottled water BPA, and Murray assisted in the award of the security fence contract.

Ellis admitted that she participated in the bribery scheme by providing Momon and Murray access to secret bank accounts established on their behalf in the Philippines, which enabled Hall and others to transfer bribe payments to them. Ellis also admitted that she obtained confidential Army contract pricing information from Momon that was designed to give Hall an unlawful advantage in the bidding process for an ice contract from the DoD. In exchange for her assistance in the bribery scheme, Ellis received a $100,000 “bonus” from Hall in August 2006.

Stamping Out Procurement Fraud in the UK and Beyond (UK)
I remember as a kid, when my father, who ran the printing and copy shop for a major university, told us about the good-will gestures that various vendors made to him. Fortunately, to the best of my knowledge, he turned down all of them. Yet procurement fraud remains a clear and present danger to all companies, non-profits, universities, governmental agencies and departments. It's something that is rarely written about, but that is clearly on the minds of executives. In past lives, I've even been asked if I would contribute something as part of a deal back to a party who helped facilitate a transaction (knowing me, I hope you could guess my response).

Given the scarcity of coverage on the subject, it's invaluable when a publication with the depth and credibility of CPO Agenda tackles the subject, as they did in the recent above-linked article. Most recently in the US, managers at Best Buy, were accused and admitted to conspiring with suppliers in a long-term fraud case. And in the UK, as CPO Agenda suggests, more incidents are coming to light, in part as a result of new anti-fraud legislation focused on foreign bribery and corruption. This includes "bridge-building firm Mabey & Johnson," who "became the first large British company to be convicted of foreign bribery after admitting that it had paid bribes to ministers and officials in Africa, the Caribbean and the Middle East to secure orders."

Others include BAE, which "agreed to pay nearly £300 million in fines in the US and the UK over corruption offences" and "three directors of the French engineering conglomerate Alstom were arrested in an operation by the UK's Serious Fraud Office ... over alleged bribery payments uncovered in an investigation carried out jointly with Swiss authorities." Many other companies and executives are getting caught up in these scandals on a global basis. But how can companies identify whether or not they're likely victims of procurement fraud? The UK's seriously named Serious Fraud Office suggests, according to the article, that "abnormal cash payments, pressure for payments to be made urgently or ahead of schedule, payments being made through a third-party country and abnormally high commission percentages being paid," are all potential markers of fraudulent activity.

In my own experience, there are multiple stages to identifying potential fraudulent activities. The most important first step is to attempt to stamp out fraud in the first place by encouraging transparency in negotiations -- often using an online tool with multiple potential vendors. Cutting into supplier margins reduces the amount of capital at play for potential kickbacks, among other benefits. Following this, it goes without saying that a closed-loop requisitioning, invoicing and payment process can play a key role as well. But the most important element of fraud detection and prevention ultimately comes down to good old-fashioned detective work and example making. In this area, there's no substitute for the ability to drill into spending, payment, vendor and related information -- not to mention working with local authorities to locate other data to determine if potential suspects are leading a lifestyle outside of their expected income bounds.

Thursday, September 2, 2010

Time out

I'm taking a short break (even if I squeeze in another post before I'm off), but will be back soon.

Serial emergency?

The Guam Department of Education started this school year with inadequately prepared buses and contracts for janitors and copiers.

It appears that contracts have been let on a monthly basis, with serial or sporadic declarations of emergency, pending the preparation and issuance of formal solicitations. The contracts have, however, all been renewed from prior contracts. It has been a rolling emergency.

GovGuam pays firms over $224K every month to clean schools
THE Guam Department of Education issued on Wednesday a stop work order on four private firms providing cleaning services to public schools but voided it later in the day after Governor Felix Camacho signed a certificate of emergency to rehire their services this month.

“We had to issue the notice because they can’t provide services until they have a purchase order for this month and we can’t issue a purchase order because the governor has not signed the certificate of emergency,” [DOE Superintendent Nerissa] Underwood explained.

She added that to continue their services would be in violation of Guam’s procurement law unless the governor signed the certificate of emergency.

The certificate allows GDOE to continue using the custodial services on a month-to-month arrangement until a contract is signed for their services.

She said that has been the arrangement for sometime now.

[The Governor's Legal Counsel, Ray] Haddock said although the governor had not issued an emergency certificate since April 30 for custodial services and the purchase of electronic copiers, and a letter was sent to GDOE, Lt. Gov. Mike Cruz, in his acting capacity as governor, did issue emergency certificates to GDOE for custodial and copier services after the letter was sent.

In the letter, the governor questioned why GDOE gave no explanation as to why they needed a declaration of emergency and were not going through the standard procurement process.

“Since March I’ve been telling them, if they want to do these emergency procurements, they have to complete the regular procurement,” said Haddock.

The governor wrote: “I do understand that circumstances beyond the control of DOE would necessitate the use of emergency procurement in some circumstances, but there is no explanation in your documentation why standard procurements could not be conducted for both copiers and custodial services.”

The governor further stated that “although I have no choice but to approve these declarations to keep DOE up and running while school is in session, I will not be able to approve additional certificates of emergency unless DOE, at the very least, begins to comply with the standard procurement process and releases non-emergency bids or RFPs for these procurements.”
Guam procurement law restricts emergency procurement to only a thirty day supply of goods and services, presumably adequate to both meet an emergency and commence any necessary usual procurement process.

These "emergencies" however were foreseeable, for the most part, and arose from failure to timely prepare for prior contract expiration.

Guam procurement law defines an emergency as meaning "a condition posing an imminent threat to public health, welfare, or safety which could not have been foreseen through the use of reasonable and prudent management procedures, and which cannot be addressed by other procurement methods of source selection." (5 GCA § 5030(x).)

It is hard to see how a series of rolling declarations is at all an "imminent" condition. It may have been imminent the first time, but the second? The third? The fifth?

It is harder to justify how failure to prepare for a proper solicitation in the face of a known contract expiry would in any sense be "the use of reasonable and prudent management procedures".

I wonder what's in their cereal? Certainly not Wheaties.