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Friday, January 30, 2015

Reverse all auctions, full steam ahead

There is one main theme here, and a case study that gave rise to it. The main theme is the light shown on the so-called "reverse auction" fad. 

The business about the FedBid business is just to add a bit of salacious spice to the otherwise drab story line. Most procurement story lines are drab. But that doesn't diminish their importance, as this blawg hopes to point out.

First, the juicy bits:

Air Force moves to debar FedBid
On Jan. 26, the Air Force suspended and moved to debar FedBid from providing reverse auctions for federal agencies contracts, on the grounds that there was "adequate evidence" of a "lack of business honesty or integrity" at the company.

Most recently, the company split its federal auction and commercial operations into separate companies. FedBid founder and former chief executive Ali Saadat is now head of the private sector business, but remains chairman of the FedBid board, while Jordan was named CEO of the federal side.

Saadat was also suspended by the Air Force while the service considers whether to debar the company.

In the immediate wake of the report, the company's board of directors appointed a special committee to determine any response or actions the company should take related to the report. That committee retained the law firm Arnold & Porter as outside counsel to conduct an independent review of company employees' actions. That review is said to have found "no legal wrongdoing by FedBid or its employees," though it did raise some concerns about how the company's internal culture dealt with third-party relationships.
So far, this is not that juicy. Just how juicy is a "cultural" problem, anyway? Blaming the culture means no one is at fault. Can't convict a culture, can we?

So, read on.

The real dirt:

FedBid barred from new government contracts after watchdog report
The federal government has barred a fast-growing Northern Virginia contractor with deep ties to the Washington establishment from winning new work because of “conduct indicating a lack of business honesty or integrity.”

Last year, the company was the subject of an investigation by the Veterans Affairs inspector general, which found that an agency contracting official helped steer a contract to the company. When a more senior VA official became concerned about the contract and put a hold on it, FedBid mounted an aggressive campaign to have the moratorium overturned, the IG found. It concluded that FedBid executives were part of an effort to discredit the VA official who put the hold on the contract and to “unduly influence VA decision makers.”

“Need to assassinate his character and discredit him,” read an e-mail from a top executive in 2012, according to the IG. The firm also vowed to “unleash the hounds” and “take off the gloves” in its “storm the castle” campaign to win back the business.
The theme -- Reverse Auctions:

Continuing with the WaPo story immediately above:
FedBid has built a thriving business over the past decade helping the government hold what are known as reverse auctions. Through FedBid Web sites, federal contracting officials post solicitations for items such as office supplies, computer equipment or furniture. Companies submit bids for the work and are told through the site whether they are the lowest bidder. If they aren’t the lowest bidder, they can try again with a reduced price, which ultimately should save taxpayer money.

The government’s reliance on reverse auctions has recently exploded, with FedBid leading the way. The company said that from 2007 to last year, the federal government made 131,623 awards through FedBid, totaling $8.2 billion, which represented nearly $1 billion in savings. In 2013 alone, FedBid said, $1.8 billion in government contracts were awarded through its system.
VA rips FedBid, questions value of reverse auctions
FedBid's claims of sizable savings generated by the reverse auctions the firm provides for federal contractors are overblown and misleading, according to the Department of Veterans Affairs' Office of Inspector General. Furthermore, Maureen Regan, counselor to VA's IG, told FCW that reverse auctions can unduly complicate the contracting process and limit competition by squeezing out potential vendors.

What Regan told FCW echoed a second IG report that says reverse auctions can inadvertently derail federal efforts to properly record contract documentation.

More significant, however, was the assertion by the OIG that the main purpose of reverse auctions -- to save money -- can be negated by multiple factors, including FedBid's fees and the Industrial Funding Fee customers paid to cover the General Services Administration's operation of the Federal Supply Schedules program.

Furthermore, the formula that reverse auction providers use to calculate savings -- subtracting the final award price from the "independent government cost estimate" -- was not reliable, the OIG argued, in part because of frequent mismatches between that independent estimate (which is required by VA policy) and the target price set by agency contracting officers. In addition, contract prices represent funds obligated at the time a contract was awarded, but many purchases were not fully funded at that time, resulting in inflation of the reported savings.

"We are enormously proud of the role that FedBid is playing, and will continue to play, in facilitating millions in cost savings for U.S. taxpayers," a FedBid spokesperson said in an emailed statement -- noting that "last year alone," the FedBid marketplace "enabled an estimated $160 million in savings for the government and taxpayers."

Regan, however, asserted that reverse auctions contain other costs, including GSA's Industrial Funding Fee, that might not be readily apparent to agencies.

The federal contracting schedules offer baseline pricing that agencies can use to negotiate lower costs, she said, adding that "it's not uncommon to get price reductions on schedule items," often by conducting a limited competition among schedule vendors. Regan said the OIG has had complaints from vendors, including a substantial number from health care supply companies, that FedBid's reverse auctions set up a "pay-to-play" system that is cost-prohibitive.

At the same time, other reverse auction vehicles might be getting short shrift. Regan said GSA offers services that comply with federal contract documentation requirements and include items on federal schedules.

Regan recommends that agencies "look at contracts and how people are buying things" before committing to the approach. "Reverse auctions were something of a fad in the 1990s," she said. "Everyone decided at the time they weren't really worth it."
Review of the Veterans Health Administration’s Use of Reverse Auction Acquisitions (RAs)
We found that priority sources such as the FSS (Federal Supply Schedule) are not utilized as required by VA policy and VHA’s SOP (Standard Operating Procedure) for all RAs.  Further, when RAs are used for FS S purchases, VHA is paying the Industrial Funding Fee (IFF) in addition to the FedBid RA fee when FedBid’s RA fee is not waived by FedBid. 
We found instances where the CO would identify an FSS source for the required products; however the Invitation for Bid (IFB) would subsequently be issued for open market bids. These situations occurred without any documentation in the contract file to justify the use of other than priority sources. In addition, if the awardee is an FSS vendor, these sales may be considered non-FSS sales which deprive the Government of the IFF.

We found that the reported claimed savings, computed by subtracting the final award price from the target price, was not reliable in determining the success of using RAs for several reasons. 
First, although the target price set by the CO should be equal to the Independent Government Estimate (IGE) as stated in VA policy and the implementing VHA SOP, we found that the target price was not always equal to the IGE, and that the basis for the target price was often not documented within the contract file.

Second, we found that the award price represented funds obligated at award and that many buys were not fully funded at the time of award, thereby inflating the reported savings. Lastly, we found that the target price could be changed by the CO during an active RA via a reposting of the IFB. Such changes were not always documented and justified within the eCMS contract file.

We also determined that COs run the risk of acquiring gray market items through RAs, because sellers are only required to self-certify that they are authorized distributors of the procured items. We found VHA was procuring items from unauthorized distributors through the use of RAs.

Third time's a charm?

Franchot takes oath with call for procurement reform
Comptroller Peter Franchot took the oath of office for his third term Monday with a call for Maryland to overhaul what he called a "broken" system for buying goods and services. He said the state's contract solicitations too often attract a single bidder, usually the incumbent provider. In other cases, he said, agencies bring in expensive extensions of existing contracts because officials didn't realize the time had come to seek new bids. He also decried a practice under which agencies contract for work and then seek retroactive approval by the board.

The current procurement system has led many potential bidders to believe the process is "rigged in favor of a few well-connected players." "This broken system does a profound disservice to our taxpayers," Franchot said.

Armenia's taxing procurement reform

Government sets new rules for conducting public procurement tenders
The Armenian government's new rules for conducting public procurement tenders stipulate that an invitation to participate in government tenders must be sent to at least three companies and published on the public procurements agency’s official website at www.gnumner.am [most of you will need a translator].

Simultaneous negotiations will be held with all the applicants on a possible price reduction. The contract will be concluded with the company that will submit the lowest price offer. Companies with overdue tax obligations will not be allowed to participate in tenders.Companies that will win the first and second places will be examined if they have overdue tax obligations.
- See more at: http://arka.am/en/news/economy/government_sets_new_rules_for_conducting_public_procurement_tenders/#sthash.k21HY3Dp.dpuf

Wednesday, January 28, 2015

The pork in the piggy backs

I have had so many posts about the abuse of the so-called "cooperative purchasing" method of source selection see, eg, here and here and here, of which "piggy-backing" is one type, that I've decided to start a new tag/label: "Cooperative purchasing".

Please read the entire article below at the link; I tend to cut and rearrange and alter the context, so you really must read the original. It's hard to believe (or is it?), and don't take my word for it.

Dropped jaws, protests over another no-bid Motorola contract
The broadband deal that Motorola secured in Harris County, Texas, offers a case study in how the company almost magically avoids head-to-head bidding on many contracts.

“I would never have thought Motorola could do this, but Motorola came in and told me such a great story, I couldn’t not go with them,” said Harris County systems architect John Chaney, according to two attendees, who were not authorized to speak for the record.

In the audience were representatives of Motorola competitors who didn’t get a chance to tell their stories.

A county attorney winced and shook her head, then tried to explain why the contract was open and fair under Texas law, even though no other company was invited to bid, the attendees said.

In a recent phone interview, county officials contended that the $7.5 million contract (the county put up 20 percent of the money) was competitively bid because it was added to a two-way radio contract awarded by the Houston-Galveston Council of Governments that Motorola won competitively in 2007.

Piggybacking on competitively bid contracts in different jurisdictions – even in other states – has become an accepted mechanism for local governments to bypass potentially lengthy and contentious procurement processes. The Houston-Galveston contract also was used by Fort Worth and Washington, D.C., to award Motorola deals worth tens of millions of dollars without taking bids from other vendors.

n the fall of 2011, Florida-based Harris Corp. and another cellular broadband player, Alcatel-Lucent USA, filed formal protests over the contract award with Texas Attorney General Greg Abbott.

To buy “wholly new technology” without inviting bids is “doing so illegally to the detriment of taxpayers,” Steve Marschilok, president of Harris’ Public Safety and Professional Communications unit, wrote Abbott.

Marschilok also said that other cities and counties were proposing to purchase broadband networks via the old Houston-Galveston contract, according to a copy of the protest obtained by McClatchy.

Perhaps as a result of those complaints, Harris County elected to invite bids for the network’s eventual expansion to cover the full county, a project that could be worth much more money.

But Motorola now had new advantages. The company not only had put together the pilot network, but it also was operating the system’s $3.3 million core, stationed at Texas A&M University. A core’s operator usually writes software rules determining what kind of equipment can work with a network and, perhaps more importantly, which equipment can’t, government and industry officials said.

When Harris County invited bids for the larger project, only one company responded: Motorola.

Motorola’s Schassler said that the county has yet to move forward with expanding the network.

Read more here: http://www.bellinghamherald.com/2015/01/27/4100927/dropped-jaws-protests-over-another.html#storylink=cpy
McClatchy has been following this story-line for a while, as has your blawger.

See this.

Saturday, January 24, 2015

Questions of bias posed by conflicts of interest are more appearance based than fact based

Given the powerhouses involved in this case, there is a great deal of granularity in the facts adduced in this case, so to help you keep focus, the basic picture is of an offeror comprised of two entities, one of which employs a key person involved in developing and monitoring the solicitation specifications for the contract. Does this picture suggest to you bias or conflict of interest, or do you require a definition as keen as of "having sex with that girl" before deciding?

As usual, read the original at the link because I play fast and loose with presenting it.

Matter of: International Business Machines Corporation: B-410639; B-410639.2, January 15, 2015
DIGEST
1. Agency reasonably concluded that the protester had an organizational conflict of interest (OCI) and properly eliminated the protester from the competition where the agency found that a member of the protester’s team was involved in developing the statement of work, solicitation, and other key acquisition documents and strategies, resulting in a biased ground rules OCI.

2. Agency’s exchanges with the protester regarding its potential organizational conflict of interest (OCI) were not misleading where the agency reasonably led the firm into the area of concern--that is, the apparent OCI associated with a member of the protester’s team’s involvement in developing and drafting the acquisition documents and strategies for this procurement‑‑so as to enable the protester to furnish any information or analysis it had to address the OCI concerns.
The Defense Logistics Agency (DLA) reports that the Defense Retiree and Annuitant Pay System, which establishes and maintains retired military pay accounts for more than 2.6 million military retirees, former spouses, and survivor beneficiaries, is built on antiquated mainframe technology dating back to 1980 that has exceeded the end of its planned lifecycle. According to the agency, the current system consists of 2.3 million lines of custom code, 40 internal interfaces between sub-components for data file transfers, and over 220 external interfaces; is highly susceptible to errors; and is difficult and costly to maintain or modify.

The RFP contemplated the award of an indefinite-delivery/ indefinite-quantity contract with a 12‑month base period and four 12-month options. The solicitation seeks a contractor to replace and upgrade the current system with the Defense Retiree and Annuitant Pay System 2 (DRAS2), which will have the capability to establish and maintain pay accounts; calculate, certify, distribute, and report payroll; provide customer service; implement changes; support interfaces; and allow data management.

As relevant here, IBM proposed to team with Booz Allen Hamilton (BAH) in performing the requirements of the contemplated contract. IBM’s proposal identified two BAH employees as key personnel. IBM’s initial proposal did not identify any actual or potential OCI or propose a mitigation plan.

The RFP specifically drew attention to the potential for organizational conflicts of interest:
Notice. The Contracting Officer has determined that this acquisition may give rise to an organizational conflict of interest (OCI). . . . The Contracting Officer shall not award a contract until the Government determines any conflict of interest is reasonably resolved. . . . [B]efore being eligible to receive an award, the Offeror shall submit an acceptable OCI plan (including mitigation plans for any identified OCIs). As such, the Government may communicate with any Offeror at any time during the evaluation process concerning its OCI plan.
The agency first sent a letter to IBM reminding of its concern regarding potential OCIs in general, followed by with the following additional information regarding potential OCIs identified by the agency:
The DLA has identified a potential Organizational Conflict of Interest (OCI) in your response to Request for Proposal. Mr. [DELETED] was or is an employee of Horizon Industries, a sub-contractor to Booz Allen Hamilton, which is one of your named subcontractors. Mr. [DELETED] may have knowledge of sensitive information that could provide an unfair advantage in submitting a proposal in response. Please address this potential OCI and provide a mitigation plan. If you are unable to provide information regarding Mr. [DELETED] directly due to a non-disclosure agreement, BAH [Booz Allen Hamilton] or its subcontractor may email the information to my attention.
In response, IBM informed the agency that there was no potential or actual OCI regarding itself or its subcontractor BAH. In this regard, IBM indicated that BAH had stated that it does not have access to Mr. [DELETED]’s deliverables; that Mr. [DELETED] had signed a non-disclosure agreement prohibiting him from providing non‑public information to BAH; and that BAH’s relationship with Mr. [DELETED] was limited to processing his invoices and time accounting, not reviewing his work products.

DLA advised this was an unacceptable mitigation plan.

So, IBM stated that its subcontractor, BAH, would end its employment of Mr. [DELETED], effective September 30. In addition, IBM stated that BAH had certified that no actual or potential OCI existed, and that Mr. [DELETED] was firewalled from BAH’s proposal team and did not participate in the proposal effort or provide BAH with any procurement-sensitive information.

After reviewing IBM’s responses, as well as gathering additional information, the contracting officer found that IBM, through its subcontractor BAH, and through BAH’s “agent/subcontractor,” Mr. [DELETED], had assisted in the development of the solicitation, the performance work statement, and other acquisition documents for this procurement. The contracting officer concluded that this participation resulted in a biased ground rules OCI because BAH, through its agent, Mr. [DELETED], was in a position to affect the competition, intentionally or not, in favor of BAH. In this regard, the contracting officer noted that Mr. [DELETED]’s financial and contractual interests were aligned with BAH; according to the contracting officer, Mr. [DELETED] had a direct financial relationship with BAH, since BAH directly pays Mr. [DELETED] to fulfill BAH’s contractual obligations to provide acquisition support for this procurement. Moreover, the contracting officer concluded that the fact that BAH was not the lead offeror submitting a proposal here was not significant because BAH still stood to gain financially from IBM receiving the award. Finally, the contracting officer stated that IBM’s effort to mitigate the OCI by having BAH terminate its employment of Mr. [DELETED] did not cure the OCI because “once a party has influenced the specifications, the harm has already been done.” The contracting officer therefore found that IBM had an unmitigated OCI that required its elimination from the competition.

IBM protested. IBM maintains that the agency’s decision to eliminate it from the competition was unreasonable. Specifically, the protester contends that the contracting officer’s OCI determination did not demonstrate the hard facts necessary to exclude a firm on the basis of an OCI. IBM also contends that the agency conducted misleading discussions by failing to specify that the agency perceived a biased ground rules OCI, as opposed to indicating an unequal access to information OCI.

Organizational Conflict of Interest

One of the guiding principles recognized by our Office is the obligation of contracting agencies to avoid even the appearance of impropriety in government procurements. The FAR requires that contracting officials avoid, neutralize, or mitigate potential significant conflicts of interest so as to prevent an unfair competitive advantage or the existence of conflicting roles that might impair a contractor’s objectivity. The situations in which organizational conflicts of interest arise can be broadly categorized into three groups.

The first group consists of situations in which a firm has access to nonpublic information as part of its performance of a government contract and where that information may provide the firm a competitive advantage in a later competition for a government contract. In these “unequal access to information” cases, the concern is the firm could gain a competitive advantage.

The second OCI group consists of situations in which a firm, as part of its performance of a government contract, has in some sense set the ground rules for another government contract by, for example, writing the statement of work or the specifications. In these “biased ground rules” cases, the primary concern is that the firm could skew the competition, whether intentionally or not, in favor of itself. These situations may also involve a concern that the firm, by virtue of its special knowledge of the agency’s future requirements, would have an unfair advantage in the competition for those requirements.

Finally, the third OCI group comprises cases where a firm’s work under one government contract could entail its evaluating itself, either through an assessment of performance under another contract or an evaluation of proposals. In these “impaired objectivity” cases, the concern is that the firm’s ability to render impartial advice to the government could appear to be undermined by its relationship with the entity whose work product is being evaluated.

The identification of conflicts is a fact-specific inquiry that requires the exercise of considerable discretion. We review an agency’s OCI investigation for reasonableness, and where the agency has given meaningful consideration to whether a significant conflict of interest exists, we will not substitute our judgment for the agency’s, absent clear evidence that the agency’s conclusion is unreasonable.

Here, based on our review of the record, we find no basis to question the contracting officer’s 15-page, single-spaced OCI determination. First, we find that the contracting officer performed an extensive review of the facts related to IBM’s potential OCI and reasonably concluded that IBM’s proposed team member, BAH, through its agent Mr. [DELETED], was closely involved in developing the ground rules for this procurement. Second, the record reflects that BAH expressed interest in competing for this requirement during the time that its agent, Mr. [DELETED], was still participating in developing and drafting the documents related to this acquisition. Therefore, as set forth in more detail below, we find the contracting officer’s determination that BAH’s involvement in this procurement resulted in an OCI for IBM to be reasonable and supported by the record.

Specifically, the agency awarded a task order for DRAS2 acquisition support services to Horizon Industries Limited, which subcontracted with BAH. At that time, BAH provided its personnel, specifically Mr. [DELETED], to perform the acquisition support services required under the subcontract, including assistance with, and preparation of, the acquisition strategy, performance work statement, analysis of alternatives, work breakdown schedules, business case analysis, cost and financial management documentation, milestone reviews, and in‑progress reviews. Mr. [DELETED] signed a document naming both BAH and Horizon as his affiliate organizations. Id. at 5.

As part of his OCI determination, the contracting officer obtained copies of the subcontract agreements under which BAH and its agent, Mr. [DELETED], were performing the acquisition support services. In reviewing these subcontract agreements, the contracting officer found that the base contract and option year contract both contained the full text of the DRAS2 program management office support services performance work statement.

The contracting officer also received input from the agency’s program management office regarding Mr. [DELETED]’s role in developing the ground rules for this procurement. Specifically, an individual from that office who also served as a member of the source selection evaluation board advised the contracting officer that Mr. [DELETED] was “intimately involved in the development of the RFP documents, PWS [performance work statement], IGCE [independent government cost estimate], and Q&As [solicitation questions and answers].” The program management office employee also informed the contracting officer that “[t]here is not an area of the DRAS2 program that [Mr. [DELETED]] hasn’t worked on.” Finally, the contracting officer obtained a copy of Mr. [DELETED]’s resume, which confirmed Mr. [DELETED]’s role in developing the acquisition documents for this procurement. Based on all of the foregoing information, the contracting officer concluded that BAH, as a result of its employee’s role in developing the ground rules for this procurement, had an actual or potential biased ground rules OCI.

Our review of the record indicates that, while Mr. [DELETED] was performing work on the acquisition documents and strategy for this procurement, BAH determined that it was interested in potentially competing for the procurement. Ultimately, BAH decided to compete for the procurement as a subcontractor to IBM, rather than as a prime contractor.

Given the extensive involvement of Mr. [DELETED] in drafting and advising on the ground rules of this procurement, and given that there is no basis to distinguish between a firm and its affiliates, at least where concerns about potentially biased ground rules are at issue, we find that the protester has not shown the contracting officer’s OCI determination to be unreasonable. As our Office has previously noted, due to the ultimate relationship of one entity to another, including an identity of interests between the entities, a firewall does not resolve an organizational conflict of interest involving biased ground rules. Further, as noted by the contracting officer, termination of Mr. [DELETED]’s employment after he had influenced the ground rules for the procurement in no way avoided any potential harm in this regard.

While IBM disagrees with the contracting officer’s determination to eliminate it from the competition because of an apparent conflict of interest, it has not shown that the contracting officer’s conclusion was unreasonable or not based on hard facts. In its protest, IBM argues that the contracting officer’s identification of a biased ground rules OCI is unreasonable since Mr. [DELETED] was unaware of the fact that BAH intended to compete for the procurement, and therefore he would have had no motivation to influence the ground rules of the procurement in a manner that would be potentially beneficial to BAH. However, BAH (and IBM) failed to inform the agency of the factual predicate for this argument (Mr. [DELETED]’s ignorance of BAH’s intent to compete) during the contracting officer’s investigation of the OCI. That is, even after the contracting officer raised concerns that Mr. [DELETED] had been involved in numerous aspects of the DRAS2 acquisition, the protester failed to inform the agency that Mr. [DELETED] was unaware of BAH’s intent to compete under this procurement. Since the protester had the opportunity to furnish this information to the agency prior to its final OCI determination, but failed to do so, this claim provides no basis for concluding that the contracting officer’s determination was unreasonable. In sum, because the agency has given meaningful consideration to whether a conflict of interest existed and its judgment has not been shown to be unreasonable, we will not substitute our judgment for that of the agency.

Finally, IBM contends that the agency conducted misleading discussions because its communications with IBM regarding the potential OCI led the firm to believe that the agency was primarily concerned with an unequal access to information OCI, when the agency’s “true concerns were biased ground rules and impaired objectivity OCIs.” Supp. Protest at 21.

This argument is without merit. As an initial matter, we note that our Office has held that, where an agency conducts exchanges with an offeror regarding the offeror’s plan to mitigate identified conflicts of interest, such exchanges do not constitute discussions. Here, the agency repeatedly put IBM on notice of the existence of a potential OCI resulting from Mr. [DELETED]’s involvement in this procurement. In fact, the agency specifically advised IBM that its decision to team with “BAH whose agent, Mr. [DELETED], has and will continue to be involved in numerous aspects of the DRAS2 acquisition and its post-award implementation,” was the source of the potential OCI. Thus, the agency’s exchanges with IBM reasonably led the firm into the area of concern -- that is, the apparent OCI associated with Mr. [DELETED]’s involvement in developing and drafting the acquisition documents and strategies for this procurement ‑‑ so as to enable IBM to furnish any information or analysis it had to address the OCI concerns.

The protest is denied.

You can't get just anything you want at the FSS restaurant

Apologies to Arlo Guthrie.

This is not an accurately complete rendition of the GAO's decision. Read that at the link.

Matter of: US Investigations Services, Professional Services Division, Inc.: B-410454.2, January 15, 2015
DIGEST: Protest against issuance of a task order to a vendor for support services pursuant to its General Services Administration Federal Supply Schedule contract is sustained where the record does not support contracting agency’s determination that the services called for under the task order were within the scope of the vendor’s contract.
US Investigations Services, Professional Services Division, Inc. (USIS) protests the issuance of a delivery order to FCi Federal, Inc. under request for quotations (RFQ) issued by the Department of Justice, Federal Bureau of Investigation (FBI), for services in connection with the agency’s Name Check and Freedom of Information Act (FOIA)/Declassification programs. The Delivery Order was issued under FCi’s Federal Supply Schedule (FSS) contract.

The RFQ contemplates the award of a fixed-price delivery order for a 12-month period of performance. The successful contractor will provide personnel to perform services in connection with the agency’s National Name Check Program. Under that program, the successful contractor will provide research, analytical, and reporting services for authorized federal agencies. Essentially, contractor personnel research FBI files to provide available and appropriate information within legal and policy constraints. The RFQ also contemplates services in connection with the agency’s FOIA/Declassification program. Under that program, the successful contractor will provide services to the agency in connection with responding to FOIA requests, and also in making determinations regarding the appropriate classification of national security related information.

The agency received three quotations in response to the solicitation. All three quotations were found technically acceptable, and all three firms also received past performance ratings of good. FCi submitted the lowest price of $13,298,366, followed by USIS and the third firm. The agency made award to FCi because it submitted the lowest price.

After being advised of the agency’s issuance of a task order to FCi, USIS filed this protest. USIS alleges that issuance of a task order to FCi was improper because the labor categories required to perform the task order are not on FCi’s FSS contract. The protester maintains that the agency erred in finding that the labor categories included on the awardee’s FSS contract encompass the types of employees required to perform the requirement. We agree with the protester that the labor categories included on FCi’s FSS contract do not encompass the solicited services.

As a general matter, FSS procedures provide agencies a simplified process for obtaining commonly used commercial supplies and services and, although streamlined, by regulation, satisfy the requirement for full and open competition. However, non-FSS products and services may not be purchased using FSS procedures; their purchase requires compliance with otherwise applicable procurement laws and regulations, including those requiring the use of full competitive procedures.

Where an agency announces its intention to order from an existing FSS, all items quoted and ordered are required to be on the vendor’s schedule contract as a precondition to its receiving the order. In the case of a services task order such as the one at issue here, all of the solicited labor categories must be on the successful vendor’s FSS contract.

The RFQ here essentially included four principal labor categories: research analysts, program managers, general consultants, and legal administrative specialists. For three of the four labor categories -- research analysts, general consultants, and legal administrative specialists -- FCi proposed a single labor category from its FSS contract, program management analyst. FCi’s FSS contract includes the following description of its program management analyst labor category:
Plans and provides analytical support for facilitation, methodology development and evaluation, business management techniques, and organizational development. Supports business process improvements and modernization projects. Key responsibilities include: Developing modern business methods, identifying best practices, and creating and assessing performance measurements.
An examination of the labor categories required under the RFQ, however, shows that the duties, responsibilities and qualifications of the types of employees solicited by the agency are not encompassed within FCi’s program management analyst labor category.

Comparing the above-quoted definitions found in FCi’s FSS contract and the RFQ, we conclude that FCi’s program management analyst labor category does not include many of the requirements for the labor categories identified in the RFQ. For example, FCi’s labor category description makes no mention of experience with paralegal, records management, declassification review or historical research career fields, and also makes no mention of in-depth knowledge of FBI policy, functions, and familiarity with other government agencies’ functions. FCi’s labor category description also makes no mention of applying knowledge of administrative principles, practices, and techniques; organizing and maintaining files and database record keeping systems; preparing, writing, editing, and creating graphs and charts; or drafting, reviewing, evaluating, and processing technical and administrative documents.

Instead of the disciplines and career fields identified in the RFQ, the principal disciplines and capabilities described in FCi’s program management analyst labor category are the development of business methods, the identification of best practices, and creating and assessing performance measurements. The focus of FCi’s labor category appears principally to be the development of business techniques and organizational development activities. Simply stated, none of the responsibilities or activities described in FCi’s labor category description -- identified as ‘key’ responsibilities in FCi’s labor category description -- is germane to the work required under the RFQ.

The contemporaneous evaluation record does not show that the agency gave any meaningful consideration to the question of whether or not FCi’s FSS contract included labor categories that encompassed the requirements of the task order. In this connection, the agency’s individual evaluators did not prepare any narrative materials when reviewing the proposals. The agency’s summary technical evaluation report and award determination similarly are devoid of any meaningful consideration of whether award could be made to FCi in light of the labor categories available under its FSS contract.

Finally, in responding to the protest, the agency states only generally that it gave consideration to whether or not FCi’s FSS contract included labor categories that encompassed the requirements of the RFQ. Even in responding to USIS’s specific allegations, the agency has not meaningfully or critically analyzed the question, or explained how it reasonably could reconcile the apparent divergence between FCi’s labor category description quoted above and the requirements of the RFQ.

[But here, the GAO ran into an obstacle preventing the usually implemented remedial recommendation, because the FBI pulled a quicky ("urgent and compelling") stay override.]

In light of our discussion above, we conclude that FCi is ineligible for award because the labor categories required to perform are not available under FCi’s FSS contract.

Ordinarily, our Office would recommend that the agency terminate the task order issued to FCi because FCi is ineligible for award. However, during the pendency of the protest, the agency elected to override the automatic stay of performance of the FCi task order based on urgent and compelling circumstances.

Accordingly, we recommend that the agency consider the feasibility of terminating the task order awarded to FCi. Should the agency conclude that it is not feasible to terminate FCi’s task order, we recommend that USIS be reimbursed the costs associated with preparing its quotation in response to the RFQ. In addition, and regardless of whether or not the agency decides to terminate FCi’s task order, we recommend that USIS be reimbursed the costs associated with filing and pursuing its protest, including reasonable attorneys’ fees. In the alternative, if the agency determines that it is feasible to terminate FCi’s task order, we recommend that the agency make award to the concern next in line for award, if otherwise proper.

It is perhaps worth reminding here that the GAO, which hears most protests in federal government contracting, has no enforcement power, thus "recommends" remedial actions it finds appropriate. The overwhelming majority of these recommendations are, however, adhered to by agencies.

Also, though not directly related to the focus of the decision, the GAO's decision included a very instructive footnote, as well as a "zingy":
[1] USIS alleges that the agency improperly found FCi’s prices reasonable. According to the protester, because FCi did not propose labor categories that were required by the RFQ, the firm’s proposed hourly rates were unreasonably low. There is no merit to this aspect of USIS’s protest. In a fixed-price contract setting, determinations of price reasonableness relate to whether a firm’s proposed prices are too high, not too low. An allegation that a firm’s prices are too low does not provide a basis for our Office to object to the agency’s price evaluation.

USIS also challenges the agency’s evaluation of its past performance. We have considered this aspect of its protest and conclude that USIS’s allegation amounts to no more than disagreement with the agency’s evaluation findings in the area of past performance. USIS’s disagreement with the agency’s evaluation, without more, does not provide a basis for our Office to find the agency’s evaluation unreasonable.

[4] It would appear that USIS is the next firm in line for award. In considering whether or not award to USIS is otherwise proper, the agency will be required to find the firm responsible. In a recent decision of our Office, we specifically questioned an affirmative determination of USIS’s responsibility made by the Department of Homeland Security, U.S. Citizenship and Immigration Services, because the record demonstrated that the contracting officer there failed to consider specific allegations of fraud advanced by the Department of Justice (DOJ) in a civil suit filed against USIS’s parent company, USIS LLC; failed to consider the relationship between USIS and its parent concern; and applied an incorrect legal standard in determining whether USIS was responsible. FCi Federal, Inc., B-408558.4, et al., Oct. 20, 2014, 2014 CPD ¶ 308 at 11. [See also, The responsibility to consider all factors to make a determination of responsibility]

Protest of Navy's BOSS contract on Guam upheld

As of November 2017, this contract is still being protested.  For an update, see The laborious SAGA of the US Navy's BOSS contract on Guam.

Matter of: CFS-KBR Marianas Support Services, LLC; Fluor Federal Solutions LLC,: B-410486; B-410486.2; B-410486.3, January 2, 2015 (The redacted version was approved for public release. The version below is my own, unofficial version.)
DIGEST

1. Protest challenging agency’s cost realism evaluation of proposals is sustained where record shows that agency’s evaluation was based on the mechanical application of a government estimate that did not take into consideration each offeror’s unique technical approach, and therefore was not consistent with the terms of the solicitation and applicable procurement statutes and regulations.

2. Protest alleging that agency engaged in misleading discussions is sustained where record shows that agency’s discussions questions were based on the results of its underlying, irrational, evaluation of proposals.
CFS-KBR Marianas Support Services, LLC, of Baton Rouge, Louisiana, and Fluor Federal Solutions, LLC, of Greenville, South Carolina, protest the award of a contact to DZSP 21 LLC, of Hagatna, Guam, under request for proposals (RFP) issued by the Department of the Navy for base operations support services for the Joint Region Marianas on the island of Guam.

The RFP contemplates the award of a cost reimbursement-type contract. The RFP advised offerors that the agency would make award on a best-value basis, considering cost and several non-cost evaluation factors. For cost evaluation purposes, the RFP advised offerors that the agency would evaluate proposals for completeness, reasonableness, balance, and realism, and that all five non-cost factors, when combined, were approximately equal in importance to cost.

After performing an initial evaluation, the agency established a competitive range comprised of six concerns and engaged in discussions with those offerors. After conducting discussions, the agency solicited and obtained final proposal revisions (FPRs), which the agency evaluated. On the basis of that evaluation, the agency assigned the protesters and awardee the following technical ratings and evaluated costs:

On the basis of these evaluation results, the agency made award to DZSP, finding that its proposal offered the best value to the government.

After being advised of the agency’s selection decision and requesting and receiving debriefings, CFS and Fluor filed protests in our Office. CFS maintains that the agency misevaluated proposals and failed to engage in meaningful discussions; Fluor maintains that the agency misevaluated proposals and engaged in misleading discussions. We sustain Fluor’s protest and dismiss CFS’s protest as academic.

Fluor essentially argues that, because the agency’s initial evaluation was irrational, it led the agency to engage in misleading discussions with the protester which led, in turn, to Fluor adding unnecessary personnel to its proposal and, ultimately, to proposing a cost that made it uncompetitive. Secondarily, Fluor maintains that the agency’s cost realism evaluation after the agency engaged in discussions also was unreasonable.

Fluor asserts that, in its initial evaluation of proposals, the agency never performed a meaningful cost realism evaluation in connection with the offerors’ proposed staffing. According to Fluor, the agency mechanically applied a government estimate in evaluating the sufficiency of the offerors’ proposed staffing. Fluor argues that the agency’s actions were improper because any meaningful cost realism evaluation is required to take into consideration the offerors’ respective technical approaches to accomplishing the requirements.  [Remember, this is a best value evaluation for a cost-reimbursement contract, and cost alone does not determine who gets the award.]

When an agency evaluates proposals for the award of a cost-reimbursement contract, an offeror’s proposed estimated cost of contract performance is not considered controlling since, regardless of the costs proposed by the offeror, the government is bound to pay the contractor its actual and allowable costs. As a consequence, a cost realism analysis must be performed by the agency to determine the extent to which an offeror’s proposed costs represent what the contract costs are likely to be under the offeror’s unique technical approach, assuming reasonable economy and efficiency.   In addition to these broad considerations, while an agency can utilize a reasonably derived estimate of labor hours based on the government’s experience as an objective standard to measure the realism of proposed costs, an agency may not mechanically apply its own estimates for labor hours or costs--effectively normalizing cost elements of an offeror’s proposal to government estimates--without considering the offeror’s unique technical approach.

The record here shows that, in evaluating the offerors’ initial proposals, the agency mechanically applied a government estimate to evaluate the sufficiency of the offerors’ proposed staffing. In particular, the record shows that the agency evaluated all proposals against an undisclosed government estimate of the number of full time equivalent staff (FTE) that the agency considered sufficient to perform the requirements. In each instance where a proposal offered less FTEs than the agency had identified as necessary for any given part of the contract ("annex"), the agency evaluators described the offeror’s proposed staffing as unrealistic and insufficient to perform in the annex identified.

In performing this evaluation, the agency concluded that Fluor’s proposed staffing was insufficient.  The record thus shows that the agency’s initial evaluation was based on a mechanical application of the government estimate to the proposals that did not consider the offerors’ varying technical approaches. In the absence of a cogent explanation for the Navy’s actions, such a mechanical application of the government estimate in the evaluation of proposals is unreasonable. We therefore sustain this aspect of Fluor’s protest.

Fluor further argues that the mechanical application of the government’s estimate discussed above led the agency to pose misleading discussion questions to the firm regarding the sufficiency of its proposed staffing. The protester maintains that it initially proposed staffing that it considered sufficient to perform the contract in light of its proposed technical approach. Fluor argues that, when it attempted to respond to the agency’s concerns during the discussions that were based on the agency’s mechanical application of the government estimate, it effectively priced itself out of the competition.

It is a fundamental principle of negotiated procurements that discussions, when conducted, must be meaningful; that is, discussions must identify deficiencies and significant weaknesses in an offeror’s proposal that could reasonably be addressed so as to materially enhance the offeror’s potential for receiving award.  Here, the record shows that the agency asked each offeror a specific question that identified precisely the number of FTEs by which the agency considered the proposal deficient.  An agency may not mislead an offeror through the framing of a discussion question into responding in a manner that does not address the agency’s actual concerns, or otherwise misinform the offeror concerning a problem with its proposal.

The agency subsequently issued a clarification to these questions, stating that it was not the intent of the agency to dictate the number of FTEs proposed, but to verify that the offeror had a methodology to accomplish the work with the number of FTEs proposed.  Nonetheless, the agency did not retract its original discussion questions.

The record shows that Fluor revised its proposal to precisely the number of FTEs identified by the agency as lacking in its initial proposal.   Ultimately, Fluor’s high evaluated cost led the agency not to select it for award, even though its proposal had been ranked first from a non-cost standpoint.  Because the record shows that Fluor’s revised staffing was raised in direct response to the agency’s discussion question, we conclude that the firm was misled to its competitive prejudice.

As a final matter, Fluor maintains that the agency essentially abandoned the original staffing estimates that it used to evaluate the offerors’ initial proposals, thereby demonstrating the arbitrary nature of the original evaluation. Fluor maintains that the agency’s final evaluation confirms that its initial evaluation bore no relationship to the offerors’ unique technical approaches, and also demonstrates that the agency’s evaluation of revised proposals failed to meaningfully evaluate the offerors’ proposals for realism purposes.

Notwithstanding the fact that the other two firms also offered additional staffing in response to the agency’s initial evaluation and discussion questions, the evaluators nonetheless assigned DZSP an outstanding rating for its proposed staffing and resources, and assigned the CFS proposal a good rating for its proposed staffing and resources (both proposals originally had been rated unacceptable under this evaluation factor).

The agency’s technical evaluators articulated no reasoned analysis for why, despite the fact that these firms did not propose the staffing initially identified by the agency as inadequate, the firms nonetheless merited these better ratings.  For reasons unexplained in the record, the agency did not evaluate the realism of the offerors’ proposed staffing where it exceeded the government estimate.  The agency’s unexplained and inconsistent application of the government estimate further highlights the underlying irrationality of its evaluation.

In effect, the agency’s evaluators appear to have abandoned the initial government estimates, as well as their evaluation findings based upon those estimates. In addition, since the evaluators did not explain why they considered the offerors’ revised staffing adequate in light of their respective technical approaches, we have no basis to find the agency’s reevaluation of proposals reasonable.
In this connection, agencies are required to adequately document their evaluation results in order to facilitate our examination of the record; where, due to a lack of documentation, we are unable to understand the agency’s evaluation conclusions, we will sustain a protest challenging the agency’s evaluation.
We have carefully considered all of CFS’s allegations and find no basis to sustain the firm’s protest. We find no merit to its allegations concerning the agency’s evaluation of technical proposals, and we also find no merit to its allegation concerning the agency’s alleged failure to engage in meaningful discussions with CFS. In addition, while CFS arguably may be correct concerning the agency’s evaluation of cost proposals, we are not persuaded that CFS was prejudiced by the agency’s evaluation in that area, and therefore find no merit to that aspect of its protest.

In light of our discussion above, we sustain Fluor’s protest. We recommend that the agency reevaluate proposals in a manner consistent with our discussion above.  After performing its reevaluation, we further recommend that the agency afford the competitive range offerors meaningful discussions based on its reevaluation of proposals.

After engaging in discussions, we recommend that the agency solicit, obtain, and evaluate revised proposals and make a new source selection decision based on that reevaluation.  Notwithstanding our conclusions regarding the merits of CFS’s protest, we point out that the firm will, in fact, benefit from our recommended corrective action because it will be afforded an opportunity to participate in any reopened competition.

Finally, we recommend that the agency reimburse Fluor the reasonable costs of filing and pursuing its protest, including reasonable attorneys’ fees. The protester’s certified claim for costs, detailing the time expanded and costs incurred, must be submitted to the agency within 60 days after receipt of this decision.

Tuesday, January 13, 2015

The "Toyota Way" has gone wayward

Over and over, we hear that government should purchase like private business, and develop better working relationships and collaboration with its suppliers. Maybe, but consider this case in point (please read the article at the link): Daihatsu Dismantling 'Toyota Way' As Market Changes, by Norihiko Shirouzu, Reuters
Daihatsu Motor Co launched the Mira e:S minicar in 2011, and the car was a hit. A number of improvements – in manufacturing, engineering, procurement – went into the car. But the real secret to success, says Kosuke Shiramizu, Daihatsu’s chairman at the time, lay in taking something out of the company’s business model. Daihatsu shaved off roughly $1,000 in the manufacturing costs of the car by dismantling its keiretsu - an informal but close interlocking business relationship between a manufacturer and its suppliers, cemented by cross-shareholdings and personnel exchanges.

Keiretsu, pundits preached, defused adversarial relationships between assembler and supplier, allowing them to share information and create better product quality. Hence Japanese automakers were able to leap ahead. [Cause and effect are not so easily understood.]

Shiramizu says the days of the keiretsu are numbered. Companies, he says, are competing for price and value by using market mechanisms instead of relationship-based arrangements. "The Toyota way is the high-cost way,” says Shiramizu, 74, in an interview at Daihatsu headquarters in the Osaka suburb of Ikeda. “Keiretsu doesn’t work anymore. If we stick with it, Daihatsu won't survive. Toyota might face a similar fate, too."

Shiramizu, who became advisor to Daihatsu's board and technical executive after stepping down as chairman three and a half years ago, says his parts procurement reform isn’t meant to be a template for Toyota. But it is being taken seriously there, he says.

Two major shifts over the past two decades in the competitive landscape have been working against Japanese car makers and their keiretsu systems.

First, Western rivals dramatically closed the gap with the Japanese. That was partly due to the fact cars have become easier to design and manufacture, because they are less mechanical and are controlled more electronically. Competition thus shifted to who could offer more value to the customer: the highest fuel economy, the sexiest look, and the most compelling functions for the lowest price.

The other competitive shift came from the emerging world. Keiretsu worked beautifully for Toyota because an overwhelming majority of the finely engineered cars it made were sold in the high-priced developed markets of the United States, Europe and Japan. That began changing in the early 2000s, with the rise of emerging economies such as Brazil, Russia, India, China, Indonesia, South Africa and Turkey. These economies already collectively buy half of the automobiles sold worldwide today.

Daihatsu is mostly in the lower end of the market. As it began buying more components from Toyota-group suppliers such as Denso and Aisin Seiki over the years, it was also stuck with Toyota's lofty quality standards. Shiramizu says Toyota’s specs are often too high for vehicles that some Daihatsu officials describe as “sandals,” as opposed to the dress shoes that Toyota makes. “Do we need parts and cars that withstand the desert heat in Arizona?” Shiramizu asks.

Shiramizu's first move was to send agents of change into the company’s procurement office. Until then, Daihatsu's purchasing office was staffed by non-technical types with little knowledge on how components are designed and produced and, says Shiramizu, "no ability to assess true cost." Instead of attacking costs, those purchasing managers put a priority on their relationships with suppliers - getting wined and dined and showered with gifts in the process, Shiramizu says.

Shiramizu then initiated another move: abolishing the “account” system that governed procurement deals. The status quo, he says, made it almost impossible for new, non-Toyota-group suppliers to do business with Daihatsu, even when they offered better quality and price. Under the account system, only existing suppliers with Daihatsu accounts could supply parts to Daihatsu. [Sounds a bit like the "best value" focus on "proven reliability".]

It allowed Shiramizu to deploy his new procurement leaders in the hunt for lower-cost parts across Japan - and beyond to China, Indonesia and India. Inoue, who was plucked out of the production engineering division by Shiramizu, and his team focused on China. The team quickly found Chinese suppliers of windshields, mirrors, speakers, and aluminum wheels at savings up to 50 percent.

One of the team's most critical findings was not a new supplier, however. It was the discovery that some account holders were slapping a hefty margin on components they procured cheaply in China.

Daihatsu last year bought approximately 1.3 billion yen worth of aluminum wheels in China without going through middlemen. “We have too many middlemen skimming off," Shiramizu says. "Getting rid of those middlemen is the shortest cut to cost savings.”

Buying directly from those suppliers has made the job of procurement specialists more complex. They have to ensure that the logistics for parts delivery are sound, making sure equipment orders are delivered to plants on time. It's worth it, Daihatsu officials say.

The China team discovered factory hubs in the eastern China province of Zhejiang for dirt-cheap generic auto parts – or, as one Daihatsu executive puts it, “fakes.” The results have been mixed: Designs by the generic parts producers are often robust, but the production quality is unreliable, according to Daihatsu officials.

One solution being pursued now is to produce on its own many of the core, high-ticket parts Daihatsu currently buys from Toyota suppliers. Those include air-conditioning and steering systems, drive shafts and wire harnesses. “Toyota suppliers aren't going to like it,” one official says, “but our basic philosophy is to go ‘in house’ - and that means no more middlemen.
Daihatsu had to find a better way to procure when it faced an austere emerging marketplace. That is exactly the condition the US, and other advanced economies, are in: austerity is the new black.

One of my takeaways from this fascinating case study is that we should not allow a fully assembled (or "bundled") product to determine if something should be made subject to "best value" rather than low price bidding.

Here, Daihatsu took the product apart, and even if it did not then acquire each part independently, it learned the true cost of the product, and that is a valuable piece of knowledge when buying in bulk, versus building in house. That's some serious market research.

An article I referenced in a recent post contained a statement by the author of it, Eric S. Crusius, that
"prior to the 1984 Competition in Contracting Act, which jumped-started best-value contracting in the federal marketplace, a common refrain heard in the federal market was “good enough for the government.” In other words, the government was content to settle for mediocrity—or worse."
That's a curious turn of phrase, as pointed out by the distinguished James F. Nagle, in his treatise, "History of Government Contracting". He points out that, in the early days of US procurement, before the Civil War, the government abandoned purchasing weaponry and other things from manufacturers when it found it could make all the parts and then assemble them "in house" in US armories and ship yards. It thereby developed the specifications needed to get exactly what it wanted, both in house and from suppliers. He says,
The rigorous inspection standards gave rise to a saying still in use today but with vastly different meaning. The saying was "close enough for government work". Originally the saying was a boast by contractors to would-be commercial customers, that their products were so well manufactured that the government would accept them even with its known high standards. Unfortunately, by the middle of the twentieth century because of scandals [recounted in the book], the same saying now is used to denote a feeling by a contractor that even shoddy work will be accepted by the government.
If we are ignorant of history, we are bound to repeat its mistakes. Taking the steps Daihatsu has taken are something out of the early days of US federal procurement; if they can do that and avoid the scandals Dr. Nagle described, we may go somewhere in procurement where man has gone before, but survive it with our integrity intact.

Monday, January 12, 2015

Cultural change is a procurement problem, too

Attacking the root of the problem in DoD acquisitions by Alex Haber, a business analyst in the national security practice at Censeo Consulting Group.
Policy changes may be limited in their ability to drive improvements in cost, schedule and performance. Many of the root causes of the chronic underperformance in defense acquisition stem from the culture that exists around who is buying. As such, results from policy changes alone without a cultural overhaul will inevitably fall short of the mark.

The list of human capital problems in the acquisition community begins with a misguided incentive structure. Few institutionalized benefits exist for edging away from the DoD 5000.02 Acquisition Lifecycle– the elaborate roadmap that directs DoD purchasing. In the words of a 25-year Air Force veteran with significant budgetary experience, acquisition officers are encouraged to focus on the “near rocks” (immediate challenges) and lean on reliable—though potentially sub-optimal—strategies. Locking in on the status quo can only serve to smother technological innovation and suppress adaptive business practices.

This issue is compounded by both internal and external misperceptions about the acquisition process. A 30-year Navy officer noted bluntly that some active duty personnel avoid or quickly seek to move out of acquisition assignments since they do not look at buying goods as the work of a warfighter. Additionally, a former Army Program Manager complained that legislators on the Hill appropriate dollars to DoD acquisition hubs without knowing “how the sausage is made."

The acquisition function’s relationship with industry is another pain point that policy changes cannot easily cure. As my former Navy colleague remarked, DoD acquisition leaders and their partners in industry use similar language in handling acquisition activities, but often mean different things. For example, a DoD-generated ‘should-cost’ modeling exercise on a particular program doesn’t decompose cost components with the granularity and analytic rigor that industry uses when conducting a similar exercise. A dollar is a dollar no matter how it is spent, yet the different ways that government and private industry evaluate cost leads to communication breakdowns and inefficiencies.

Going further, the Pentagon continues to commit substantial financial and human resources to internal Research & Development efforts even as procurement specialists habitually look first to private industry to meet their technology and management needs. DoD-wide policy can certainly nudge the department’s procurement arms in the direction of healthier, more efficient relationships with their suppliers. However, organic partnerships will only truly evolve when leaders in the acquisitions community start re-examining this dynamic and better articulating roles and responsibilities to industry on their own, program-specific terms.

To go back to incentives, the emphasis for rank-and-file procurement specialists is on designing briefings, not developing technological capability. In some cases, colleagues in the Pentagon have heard of acquisition managers presenting nearly 80 separate briefings to over 100 people… on a single program in a single year! Already restricted by weighty procedural obligations, a distressing trend of budgetary uncertainty and the resulting focus on the execution year alone further limits the procurement function’s ability to exercise foresight and creative thought.

If Ashton Carter can inspire a new wave of cultural norms along these lines, broad-based acquisition reform might actually amount to more than just a bureaucratic Band-Aid.

Sunday, January 11, 2015

Procurement is boring

How long was it from the invention of the wheel to mass production of automobiles? 

If you compress that time line down to months or years, you begin to understand the problem of procuring anything when the conditions requiring its acquisition change faster than production of the thing can keep up.

That was my first reaction to reading an item this morning, being outraged by the claim it made, then looking further into it and feeling outraged that the article intended to outrage me in the first instance.

It all happened when I got a Google News link to this: The Comedy the Pentagon Wishes We’d Forget. (Now, the movie this is based on and the book that gave rise to it are from pre-Millineal times, but there it was in today's news items.)
In the early 1980s, Air Force colonel James Burton was part of a group of reformers who, frustrated by billions wasted on needless research and development, attempted to change how the military did business. The Pentagon Wars chronicles his reform movement and the corruption within the Defense Department’s procurement process.

The Bradley fighting vehicle was a weapon system with countless flaws. Part troop transport, part fighting vehicle and part scout—it didn’t do any of these jobs well. The Army resisted Burton’s requests for a live-fire exercise. Ultimately, Burton got his exercise and proved that the Bradley needed serious changes. Despite the upgrades, the APC still had problems. It survived the 1991 Gulf War, taking out more Iraqi tanks than the M-1 Abrams. Quite a feat for a troop carrier. It didn’t fare as well on its return trip to Iraq in 2003. The Bradley proved vulnerable to improvised explosives and rocket-propelled grenades. It’s not an ideal counterinsurgency vehicle.

The Pentagon’s procurement process still produces broken weapon systems.
Then I read another article, this one a couple of years old, which said the whole thing could have been cleared up if only Burton had had a Project Manager as part of his team.

The Pentagon Wars – A Product Management Disaster
The film depicts the development of the Bradley fighting vehicle. Col Burton was appointed by Congress as an outsider to oversee the testing of new weapons in development, including the Bradley. In order to get up to speed with the development history of the Bradley, Burton dives into the mountain of paperwork documenting it’s development. This is where we pick up the movie below for a 11-min scene that takes us through the “product development process” in flashbacks.
I presume this 11 minute scene is what the first article above referred to as "The design-by-committee is one of the funniest moments in the 1998 HBO film The Pentagon Wars. It’s also uncomfortably close to the truth."

I sensed a real scandal. Alas, I then came across this forum below. 

It begins with a question about the development of the Bradley. The responses were enlightening, and presumably more credible than the Hollywood version. 

It seems all the changes in the Bradley were not born of an 11 minute design-by-committee scene.

Topic: Truth to The Pentagon Wars and the Bradley IFV??
Gubler: Rule number one of understanding history: never, ever take your history lesson from Hollywood. The story as outlined in ‘Pentagon Wars’ is as misleading and full of sh*t as the rest of that movie.

Gubler (again, after an exchange of comments): The movie Pentagon Wars and to a lesser extent the book primarily rely on ignorance of the armour needs and specifics of the Bradley to create the appearance of scandal.

The Bradley was designed to be resistant to splinters from nearby bursts of 152mm high explosive shells and hits from 14.5mm armour piercing bullets fired by Soviet heavy machineguns. These of course are not the only Soviet weapons on the battlefield but they were the type of weapons the Bradley was mostly going to be exposed to in its normal mode of use on a linear battlefield.

This protection requirement was based on how armoured personnel carriers (APCs), later renamed infantry fighter vehicles (IFV), were to be used on the linear battlefield in places like West Germany trying to stop a Soviet invasion. That is the vehicles move the infantry forward through the area target suppression fires of the Soviets but don’t close with the enemy to destroy them. The infantry do the later on foot. It is this closing with the enemy on the battlefield that exposes an APC to the fires of anti-tank weapons like the RPG or BMP’s 73mm gun. Weapons that are not effective at long range. Also the APC didn’t have to worry about long range anti-tank weapons like guided missiles or enemy tank guns because it was never to remain stationary while exposed to enemy direct fires like a tank does. However the type of suppressive fires they would face are artillery barrages and long range machinegun fires.

When the earlier APCs were designed (M75, M59, M113) the typical Soviet weapons used for suppressive fires were 122mm artillery and 7.62mm machineguns. So they were designed to be resistant to these weapons. But in the 1950s and 60s the Soviets upgraded these weapons to 152mm artillery and 14.5mm machineguns. So the Bradley and its predecessor the XM723 were specified to be resistant to these more lethal weapons the Soviets would use for their area supression.

In non-linear battles APCs were found to be exposed to anti-tank fires. As was seen in counter insurgency wars or deep penetration offensive actions like the IDF applied in Lebanon in 1982. Since they were never designed to be resistant to these types of  weapons they suffered high losses. But this was for the US at least a secondary requirement as the primary and most important battlefield was the linear defensive war in West Germany. After the Bradley was introduced the Soviets upgraded the BMP with a 30mm gun that could fire bursts of armour piercing ammunition to long range in place of the 14.5mm gun. This required an upgrading of the Bradley’s armour in the A2 version to be resistant to the 30mm armour piercing round. While claimed as a response to the Burton trials it had nothing to do with it.

The issue about vehicle survivability that Burton seized upon when the vaporifics issue was shown to be so much hot air was crew survivability after a penetrating hit. This argument, completely factually correct, was that the APCs like the Bradley with their fuel and ammunition stored inside alongside the large number of human occupants were highly dangerous after being hit and penetrated. That the sympathetic explosions of the fuel and ammunition made it extremely unlikely any of the crew would escape the vehicle after being hit.

This was of course no surprise to anyone involved in the design and use of APCs including the Bradley. Because of course it wasn’t designed to be exposed to these kinds of fires in the first place so why make it survivable to such a hit? You don’t build a street car to survive a roll over at speeds over 250 kph (~150 mph) because they don’t drive that fast. But you do build a racing car to survive such a roll over. However the sight of a burnt out APC is as emotive as a crushed street car even if the likelihood in the primary means of operations was extremely low. Burton was able to get the Army to build a Bradley with all fuel and ammunition moved to separate armoured boxes within or outside the vehicle. This vehicle was never entered into production however and fans of the Pentagon Wars frequently mistake this vehicle for the A2 armour upgrade. Even though the later vehicle retained all of its fuel and ammunition inside the vehicle alongside the occupants.

Since the end of the Cold War and an increasing focus on counter insurgency and offensive operations the US Army and others have upgraded their protection requirements for APCs.  Now they are often as high as tanks and with high flank protection. But this does not invalidate the effectiveness of the original design of protection for the Bradley. A vehicle that at its time of introduction was along with the West German Marder the most protected APC in the world and if asked to do what it was designed for would have provided adequate protection for infantry mobility in West Germany against a Soviet invasion.

Good governance requires good procurement everywhere: China

This is not a discussion of procurement by the People's Republic of China. It is simply a place to start if you've never considered the topic.

One summary (from 2010) is available from the US Library of Congress: Government Procurement Law and Policy: China

A useful narrative of the topic (from 2012) is available here: Navigating China’s Government Procurement Market.    Also, from the same source (in 2011), see: Domestic Innovation and Government Procurement Policies

More recently:

China standardizes procurement for more transparency (January 1, 2014)
The State Council, China's cabinet, announced on Wednesday new regulations under the Government Procurement Law to induce transparency and promote fair competition. Under the new regulations, procurement information will be made public. Procurement contracts should be published through the media, while information concerning the bidding results and transactions will also be made public.

Supervision and management of procurement will be improved through public scrutiny. Punishment for illegal practices, such as fraud and back-door operations, will be made more severe. The regulations tighten controls on every link of the procurement chain by setting up review committees.

The new regulations prioritize energy saving and environmental protection. They favor small companies, less developed regions and ethnic minorities.

A statement released after the meeting said that the regulations are important for law-based, clean government, and will have an important bearing on public trust. Rigid restrictive measures and management will streamline the procurement process, improve efficiency and promote frugality.
PLA launches website for military equipment procurement
The Chinese People's Liberation Army (PLA) has launched a website www.weain.mil.cn on Sunday for the procurement of military equipment, according to people.cn. The launch of this online platform will help accelerate the reform pace and break down the information barrier, an official said.

The website will mainly publish new demands for military equipment on the first working days in January and July.

The Chinese military has been pushing for reforms of military procurement as part of a larger government procurement reform effort. The PLA reforms aim to introduce competition among suppliers and improve the overall quality of the military's equipment, sources from the PLA General Armament Department said.

Best buy based on price or value?

When you are standing in that long isle looking at all the shampoos available to you on the five shelves of product (as I experienced this last weekend), what moves you to choose one of them? (In my case, I just moved on, overwhelmed, deferring to whatever my wife decides to buy.)

Presumably, if you are a rational, frugal, person, you would choose the one that you needed, at the lowest cost. That requires filtering all the brand and other marketing temptations, of course, and knowing if you have oily hair, itchy scalp, or other conditions you are trying to address (adding color, conditioning, or ego boosting marketing imagery). Thus, you really do need to know what you need if you are going to be a smart shopper, before you go to the store.

But when your requirements are novel, either because you are going where no man has gone before, or whether the vehicle by which you want to get there is in the flux of major technological changes, you need to do more homework, have an open mind about what you do in fact need, and be prepared to pay more than one particular product costs in order to get what you think will better suit your anticipated but unarticulated circumstances.

That is the main reason for a variety of government contracting procurement methods: one size does not fit all.

But, it is important to understand why one method is superior to another, and, critically, to understand the role price pays in each different method. The article below is about what the US federal contractors call the low-price/technically acceptable source selection technique, known as LP/TA. Those of us more closely aligned to the ABA Model Procurement Code refer to it as the "multi-step" bid process. 

Don't be confused by the terminology. Under an Invitation for Bid and under the LP/TA price is the ultimate determiner for award: low price wins. The difference is that in the plain vanilla IFB, the final specifications are in the bid package (subject to minor changes along the way), whereas under the multi-step bid process, the government first solicits "unpriced technical offers" and the means is established whereby both the technical offers and specifications can be fine-tuned (within the scope of the original solicitation) before a call for final prices.

This is why it is absolutely essential in every method of source selection, especially low-price bids, to carefully identify the absolute minimal needs requirements and clearly communicate that to vendors by translating that into specifications that can be understood by the lowest common denominator of experienced reader -- the judge.

The low price scheme differs from the negotiated contract/"best value" procurement method, where low price is not determinative, with price being only one of several factors in determination of award. To the extent that the non-price factors are more subjective than objective, fairness and accountability for award determinations are more problematic than with low-price bids.

The risk factor must also be considered in making the choice of procurement method. Under the low-price method, the government bears the risk of identifying its need and translating that into specifications. Under the "best value" method, the government bears the risk of paying too much for something it doesn't understand, ending up with something it may not need. 

(It's having that kind of risk that led me to walk out of the store and "let" my wife select the shampoo.)

With that backgound, read the following articles in point and counter-point; don't just take my rendition of it, though -- read the articles for stuff I leave out, rearrange and paraphrase, etc.

Finding a Bargain for Government Buyers Shouldn’t Be a Crime, by J. David Cox J. David Cox Sr. is national president of the American Federation of Government Employees.
Contractors, who bill taxpayers a whopping $500 billion annually for goods and services, hope to use the “acquisition reform” moniker to minimize the importance of cost-efficiency in the federal acquisition process.

The No. 1 objective of contractors is to demonize the low-price/technically acceptable source selection technique, known as LP/TA, so that its use is greatly limited if not proscribed.

Contractors would prefer that DOD use a more expensive process called “best value,” which allows them to charge more for features that warfighters usually don’t need. A contractor who believes DOD should be asking for more can suggest additional features to the contracting officer, who can then include them in a new or revised solicitation, if necessary, so the most cost-efficient qualified contractor can then be identified.

The Government Accountability Office reports that DOD is using LP/TA more frequently to generate savings. GAO, however, dismisses contractor allegations that such savings come at the expense of quality: “Best value processes continued to underlie the vast majority of DOD’s new, competitively awarded contracts. DOD has increased its use of the LP/TA process in recent years for higher value contracts, and its decision-making regarding which source selection process to use did not appear to be ill-advised.”

Solicitous lawmakers profess fear that LP/TA’s emphasis on costs will erode contractor confidence and undermine the industrial base. Think tanks produce paid-to-order research that purports to demonstrate a link between LP/TA and poor goods and services. Helpful trade publications breathlessly report every contractor complaint about LP/TA, however unfounded. The goal of this public relations campaign is to enact prohibitions on the use of LP/TA or to at least make the technique so controversial that acquisition personnel will use the best-value technique instead.

There is a consensus in the so-called “acquisition reform” debate that the Pentagon needs to issue better and more detailed solicitations, which is another argument for preserving the LP/TA technique because it requires discipline and knowledge to write quality specifications and/or statements of work. In contrast, “best value” is often used as a crutch by agencies to allow contractors to tell DOD what to buy.

The key to successful use of LP/TA is for contracting officers to specify the critical acceptability criteria, which can often be easily accomplished with military equipment and services. Best value may be the appropriate technique when DOD doesn’t know precisely what it is seeking to purchase, or when the work is inherently difficult to describe. Acquisition personnel represented by the American Federation of Government Employees believe that the LP/TA technique provides the necessary level of performance at a lower cost to the government.
Acquisition 101: When a Bargain Isn’t a Bargain by Eric S. Crusius, a partner with Fed Nexus Law, who focuses on government contracts, cybersecurity, employment law and complex litigation.
LPTA certainly has its admirers, but even the most ardent supporters in the contracting community recognize its severe limitations. Nevertheless, J. David Cox, national president of the American Federation of Government Employees, offered a full-throated endorsement of LPTA in a recent column in Government Executive. Mr. Cox stated the reasons why LPTA is preferred to the “best-value premium” approach to acquisition.

LPTA is simply a road leading to mediocrity.

Here are several reasons he is wrong:

“Best-value premium” is a misnomer because these procurements still allow agencies to choose the lowest cost option. With any best-value procurement, the agency always has the discretion to choose the lowest bid unless something compelling exists that is worth a premium. This approach allows agencies the flexibility to pick the option that best suits their needs.

LPTA is often used where it should not be used. “Lowest price/technically acceptable” can be an appropriate mechanism in highly regulated or commoditized industries, where there is little differentiation between minimally acceptable products [such as the vacuum cleaners he mentions in the article??]. The approach, however, is popping up in situations where marginal product quality is a differentiator (such as medical products used to care for soldiers) and in the outcome-based services industry. A long dissertation is not necessary to explain why that approach is highly problematic. Would you like it if your children’s school hired its teachers on an LPTA basis?

LPTA often ends up costing more. This contracting method frequently attracts contractors who are unable to fulfill the requirements or complete the work without great assistance from the government customer. (This can be the case especially when past performance is not evaluated.) Eventually, drives up costs. It has held true through time with products that are minimally acceptable—the example of the vacuum cleaner is illustrative. In addition, this contracting method is driving responsible contractors away from doing business with the federal government, resulting in less competition. In fact, the number of small businesses participating in the federal marketplace has declined over the past few years.

There are also social reasons to shy away from using LPTA, such as lower wages and benefits for contractor employees and the exclusion of small businesses from government contracting, all of which drives down the overall economy.

While LPTA certainly has its place in federal contracting, that place is a small defined box with highly commoditized requirements. Anything larger robs agencies of much needed discretion, drives valuable contractors away from the federal marketplace, and enriches lawyers like me with more potential clients seeking assistance in filing bid protests.

Wednesday, January 7, 2015

A stop work order of a different order

It is clear that contract administration is a component of that range of matters falling under the "procurement" umbrella. Thus, contract disputes, particularly government contract disputes that this blawg tends to stick to as "procurement" rather than simply "acquisition", are of interest. The case reported in this post was spotted on the Lexology website, which reported the article as originally posted on the Gordon & Rees LLP Construction Law Blog.

The case is Kiewit-Turner v. Department of Veterans Affairs (CBCA 3450, December 9, 2014), decided by the U.S. Civilian Board of Contract Appeals. The decision is in the nature of an interpretation of the contract and the subsequent rights and obligations of the parties, brought by an action for declaratory relief, a uniquely useful contract remedy. As usual, this is a my own rendition of the decision and you must read the original decision for citations, fullness, context and accuracy, etc.
This decision answers the following three questions: (1) Did the contract modification known as SA-007 obligate the respondent, the Department of Veterans Affairs (VA), to provide a design that could be built for $582,840,000? (2) Did the VA materially breach the contract by failing to provide a design that could be built for that amount of money? (3) If such a breach occurred, is KT entitled to stop work?

After hearing testimony for eight days, reviewing a voluminous documentary record, and considering lengthy briefs and reply briefs submitted by the parties, we now answer each of these questions in the affirmative.

On August 31, 2010, the VA awarded to KT a contract for the performance of preconstruction services on a medical center campus in Aurora, Colorado. The contract included an option for the performance of construction services as well. The contract was described as an “integrated design and construct,” or IDc, type contract – something similar to the “construction management at risk” or “construction management as constructor” types of contract used in the private sector. A key early VA funding decision was establishing a construction cost target, known as the estimated construction cost at award, or ECCA, at $582,840,000. This ECCA was prescribed, on the same day as the KT contract was awardedThe VA had never used this type of contract before. The agency’s own project management plan recognized as a high risk that “IDc represents new contracting approach for VA; does not fit existing procedures which is complicated by VA culture that does not encourage or is [not] comfortable with new approaches.”

Indeed, the VA did not use the IDc mechanism properly right from the start. This limited the agency’s flexibility to make modifications based on KT’s pre-construction services advice. A September 2011 review by the Army Corps of Engineers, which was commissioned by the VA, confirmed that the IDc contract was not properly used: “[T]he IDc contract type may have not been appropriate for the Medical Center Replacement in Denver. . . . [P]roceed[ing] with design development to major design milestones (DD1) prior to procurement of the IDc contractor . . . did not permit the IDc contractor to integrate with the designer to achieve the benefits related to this contract type. . . . The current methodology appears to be counterintuitive to the Government’s ability to achieve best value.”

KT informed the VA at many stages that the design lacked coordination and completeness, that the design was over budget and included elements that were above the standard for a healthcare facility, and that value engineering (VE) was not being incorporated into the design. As early as October 2010, an independent advisor was cautioning the VA’s project executive that the costs of the project, per the then-current design, were increasing. In November, the project executive’s supervisor told him that “[the] DD1 packet is unsatisfactory and the JVT (the original design team) is not listening to the directions they are given from the user [side] or from the CFM [VA Office of Construction and Facilities Management] side.”

In September 2011, the agency’s project executive and contracting officer issued a critical performance evaluation of the JVT designer. They complained that the JVT had chosen form over function, placed an over-emphasis on aesthetics, had produced an unnecessarily complex design, did not believe that a budget problem existed, and was often uncooperative with the agency. In December 2011, the contracting officer denied the JVT’s request for release of retainage, “[d]ue to the ECCA above the contract stated limit and the complete design has not been accepted.” In March 2012, the contracting officer reminded the JVT that under its contract, when bids exceeded the estimated price, the JVT had to “perform such redesign and other services as are necessary to permit contract award within the funding limitation.”

Nevertheless, the VA asked KT to prepare a proposal for the optional work under its contract – constructing the medical facilities. In July 2011, the parties agreed that KT would submit a firm target price (FTP) proposal in the amount of $603 million. On August 25, 2011, KT submitted such a proposal. The price was $599.6 million for construction itself and $3.4 million for all pre-construction activities, with a ceiling price of $609 million. The FTP was based on a detailed analysis of DD-2 enhanced drawings. The proposal included many pages of general, technical, and pricing clarifications, which noted assumptions on which the proposal was based. We credit the testimony of KT’s former managing partner that including these sorts of assumptions and qualifications in a proposal is typical in the commercial world for an IDc-type contract where the design is incomplete. The proposal assumed that the VA would ensure that the design include $23 million of value engineering (VE) items and that KT would negotiate price reductions of nearly $31 million from its subcontractors. KT’s detailed FTP proposal became known as “The Book.” By the time that KT submitted its proposal, the VA also had in hand an independent estimate which showed that the cost of construction would be $677,697,408.

Chris Kyrgos, the VA contracting officer’s supervisor demanded that KT remove the clarifications, qualifications, and assumptions from The Book and present a proposal based on the most recent set of drawings. KT’s managing partner explained further that in light of the contractor’s estimate that the current design would cost more than $664 million to construct, KT could not possibly build the project for only $603 million. At this point,it was proposed that if the VA would agree to present a set of drawings that could be constructed for the ECCA, KT would agree to perform the construction work for the price it had offered. A handwritten statement entitled “Agreements – Path Forward” was signed. The three key paragraphs of this statement read:
1. All parties agree that they must get price to $604 mil. They will each expend resources to keep that goal.
2. VA shall cause JVT to produce a design that meets their ECCA with use of alternates and other methods as a safety net.
3. Agreed: . . . FTP set to $604m[illion]/clg.[ceiling]@610. (The difference between the ECCA of $582,840,000 and the FTP of $604 million was that the latter included pre-construction and off-site infrastructure work, as well as other items, but the former did not.)

Both parties understood that by making this agreement, the VA recognized that it would have to ensure that through the use of VE and other means, the JVT would produce a design which could be constructed for less than the current estimated cost of the project. KT’s managing partner testified that “[t]he big caveat there is they have to produce a design that meets the ECCA because the current design didn’t come anywhere close to that.” Demonstrating that both parties understood this, in March 2012, KT’s deputy managing partner and the VA contracting officer gave to personnel from both parties a presentation entitled “SA-007 and Managing to the $604M.” The presentation asked, “Does SA-007 clearly define the scope of work?” and provided the answer, “No. Defines the box.” The VA adhered to this understating well into 2013.

KT expected, based on communications from the VA, to receive 100% complete construction documents by the end of January 2012. In late 2011, however, the VA let lapse its architect/engineer peer review contract, and without a peer review, the agency would not release the 100% design package. KT told the VA that the “lack of this information is currently creating numerous negative impacts in material procurement/fabrications, obtaining approvals of submittals, coordination of trades, putting work in place in the field, as well as obstructing our ability to maintain the schedule as currently planned.” KT proposed that it solicit subcontractor bids based on 95% drawings, but the VA rejected this request.

The 100% documents were finally delivered to KT on August 31, 2012. These documents turned out to be far from finished, however. The incomplete design, and changes to it, prompted KT to issue an unusually large number of requests for information (RFIs), seeking clarification as to design elements. Responses to RFIs were often late and/or incomplete.

KT planned to subcontract about 85% of the work on this project. All subcontracts valued at $300,000 or more were required by the contract to be secured through a competitive process in which at least three bids were made. The subcontracting process required consent to each subcontract from the VA’s contracting officer. By the fall of 2012, according to witnesses from KT, the VA medical center, and a VA resident engineer on the project, prospective subcontractors were reluctant to submit bids for project work because subcontractors were not being timely paid for work they had performed. Sureties were also refusing to participate in the project due to the lack of timely payment to subcontractors. Those firms that did bid on subcontracts increased their prices to account for the risk of not being paid timely, or even not being paid at all. Meanwhile, the project’s cost was increasing.

In March 2013, KT submitted to the VA a firm fixed price proposal, based primarily on competitive subcontractor bids, in the amount of $897,584,831 (with clarifications and qualifications). The VA rejected this proposal, with the contracting officer stating that the agency “will continue to hold Kiewit-Turner responsible to the firm target price and ceiling price established in SA-007.” (The parties never agreed on a firm fixed price, as opposed to a firm target price, for KT’s work.) In June, KT told the VA that the cost could be as high as $1.085 billion.

KT proposed many multi-million-dollar VE changes to modify the design so as to bring it within budget. Most of them were rejected by the VA. Often, however, even if a VE proposal was approved at all levels of the VA, the JVT refused to incorporate it into the design. In February 2014, the VA adopted the figure of $630 million as the “independent government estimate.” Even at the amount of $630 million, JVT members complained that the estimate was $48 million over the ECCA and would cause the JVT to have to redesign the project to lower its cost.

In January 2013, the VA brought together KT and the JVT to discuss how the project might be redesigned to be within budget. A VA executive explained that “the VA’s intent [was] to focus on the JVT’s obligation to deliver a design at or below the ECCA.” The three-day meeting which ensued – called the “blue ocean” meeting – was devoted to brainstorming to develop cost-cutting ideas. The agency tells us in its brief that it ultimately accepted only about $10 million of the blue ocean ideas.

On April 30, 2013, KT requested a final decision from the contracting officer as to whether the VA had breached its obligation under the contract to provide a design that could be built for the ECCA of $582,840,000 and whether KT consequently had the right to suspend work. The contracting officer issued a decision denying that the VA had breached the contract and directing KT to proceed with construction of the project. The agency has no plans to redesign the project. According to VA witnesses, the agency has approximately $630 million appropriated for construction of the project.

In June 2013, the contracting officer wrote to the JVT, “Please do not proceed with any cost cutting items from the January 2013 meeting.” Also in June, the VA’s director of cost estimating determined that the Jacobs estimate of nearly $785 million should be rejected because Jacobs’ failure to use actual known costs was a “fatal flaw” that undermined the reliability of the estimate. (The reason that Jacobs had not used actual known costs, however, was that the contracting officer had specifically directed the firm not to use them. The contracting officer did not disclose this fact to the cost estimating director.) And the contracting officer told KT that it must use pricing from The Book, the contents of which had been made irrelevant when SA-007 was agreed to, as the basis from which pricing change orders would be considered.

A KT executive testified at our hearing in June 2014 that KT had already financed $20 million worth of work for which it had not been paid and projected that this figure could reach $100 million by December 2014.
Discussion
(1) Did contract modification SA-007 obligate the VA to provide a design that could be built for $582,840,000?

SA-007 could not be more clear: “The VA shall ensure the A/E (Joint Venture Team) will produce a design that meets their Estimated Construction Cost at Award (ECCA) with use of alternate and other methods as a safety net.” The ECCA was $582,840,000 at the time that SA-007 was agreed to, and it remained at that number throughout the period discussed in this decision. Because the language is unambiguous on its face, its plain language dictates an affirmative answer to the question. Use of the words “shall” and “ensure” demonstrates that the VA must make certain that the design will meet the ECCA.

“Although extrinsic evidence may not be used to interpret an unambiguous contract provision, [the Court of Appeals for the Federal Circuit has] looked to it to confirm that the parties intended for the term to have its plain and ordinary meaning.” TEG-Paradigm Environmental, Inc. v. United States, 465 F.3d 1329, 1338 (Fed. Cir. 2006). The extrinsic evidence here confirms that the SA-007 paragraph regarding the ECCA means exactly what it says. The VA’s commitment to produce a design that could be built for the ECCA was the key to the parties’ agreement.

The agency maintains that KT is obligated to perform construction work for the FTP, altered only by the cost of scope changes and adjustments to the profit percentage pursuant to a clause contained in SA-007. The ECCA provision, according to the VA, is inconsistent with the profit adjustment clause. These contentions are not well taken. The mention of the ECCA in SA-007 is not just material to the agreement – it is critical to the agreement. SA-007 clearly links the ECCA and the FTP, providing that the latter is dependent on the former. Altering the contract price to account for scope changes is not possible, for reasons we discuss later in this opinion. There is no inconsistency between the ECCA provision and the profit adjustment clause; if the VA had produced a design which could be constructed for the ECCA, the profit adjustment clause could have been implemented in accordance with its terms.


(2) Did the VA materially breach the contract by failing to provide a design that could be built for the ECCA of $582,840,000?


“Not every departure from the literal terms of a contract is sufficient to be deemed a material breach of a contract requirement.” “A party breaches a contract when it is in material non-compliance with the terms of the contract.” “A breach is material when it relates to a matter of vital importance, or goes to the essence of the contract.” “The standard of materiality for the purposes of deciding whether a contract was breached is necessarily imprecise and flexible. The determination depends on the nature and effect of the violation in light of how the particular contract was viewed, bargained for, entered into, and performed by the parties.” We consider also the factors enunciated in section 241 of the Restatement when determining whether a breach is material:
In determining whether a failure to render or to offer performance is material, the following circumstances are significant:
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;
(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
The VA’s breach of its contract with KT, by failing to provide a design which could be constructed for the ECCA, is of vital importance, as it goes to the essence of the agreement. The breach is material under each of the Restatement standards (as detailed meticulously in the decision). Applying these principles, we find that the behavior of the VA has not comported with standards of good faith and fair dealing required by law. The agency failed to provide a design that could be constructed within the ECCA because it did not control its designer, the JVT. It paid no heed to VE suggestions for cost reductions which were made by KT and Jacobs (or even those which were accepted by the agency’s own medical center personnel following the “blue ocean” meeting). The agency delayed progress of construction, such as by delaying the processing of design changes and change orders, as described under factor (a) above. The agency disregarded cost estimates by KT and Jacobs, even to the point of rejecting a Jacobs estimate because it was developed under restrictions which the agency itself had imposed. The agency adopted as an independent government estimate a document which was neither independent (it was developed by a subcontractor to the JVT, an entity which had a strong interest in the result), nor by the Government (it was by the JVT), nor an estimate (it was by admission of the chief estimator an academic exercise), and the number was so far below any previous estimate as to be of dubious accuracy. The agency did this notwithstanding the testimony of every witness who addressed the matter, including several VA witnesses, that an “independent” estimate should not be made by a party with a vested interest in the outcome. The agency ultimately directed KT to continue its construction work for the FTP, even though the agency refused to fund that work appropriately.

We do not know what the cost of construction of this project ultimately will be. Whether it is any of these figures, however, it will be significantly in excess of the ECCA of $582,840,000. We find that beyond doubt, the VA’s breach of its contract with KT was material.

(3) Is KT entitled to stop work?

The Court of Appeals for the Federal Circuit has held that “[u]pon material breach of a contract the non-breaching party has the right to discontinue performance of the contract.” The Court has explained further, “The choice of remedy is generally with the non-breaching party, and only in exceptional circumstances will equity require the non-breaching party to continue to perform the remainder of the contract.” “[I]f a contract is not clearly divisible, in accordance with the intention of the parties, the breaching party can not require the non-breaching party to continue to perform what is left of the contract.”

The VA draws our attention to Northern Helex Co. and Cities Service Helex, Inc.), two cases in which the Court of Claims held that if a contractor continues performance under a contract, without protest, notwithstanding the Government’s breach, “the obligations of both parties remain in force and the injured party may retain only a claim for damages for partial breach.” The VA’s analysis, however, ignores the phrase “without protest” which is part of the teaching of these decisions. The record is clear that KT has been proceeding with the construction (to avoid any possibility of being charged with being in default) under strenuous protest, including the very constructive advancement of VE proposals, throughout the post-SA-007 history of the project. As a matter of law, KT has the right to stop performance.

As enunciated in this opinion, we afford Kiewit-Turner the declaratory relief it seeks.

Another similar tale of contract dispute over claimed misrepresentations of material facts by the government, entitling the contractor to damages, is reported in:
Court of Federal Claims determines that government contractor may recover for losses attributable to omissions and inaccuracies in data provided by government in negotiated procurement .