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Sunday, October 30, 2016

It's sticking to "the letter and spirit of the evaluation procedures" that counts

These articles, which I've sliced and diced to my own ends, discuss the ramifications of looking at bid protests from a practical, not pendantic, view point. You can read the case discussed here; you should read the full stories at the links provided, lest my version taint your perspective.

OPINION: Contractors must recognise new US procurement rules
Nothing illuminates the essential characteristics of this new era better than the Government Accountability Office’s stinging and even humiliating rejection of Boeing’s protest at the US Air Force’s decision to award the long range strike-bomber (LRS-B) contract to Northrop Grumman a year ago; the GAO’s newly-released decision offers valuable instruction for competing in this new era.

The most surprising revelation in the report is how the USAF structured the LRS-B competition. It may be the first time it has acquired a combat aircraft based on a lowest-cost, technically compliant bid. Northrop heavily invested corporate funds in classified risk-reduction efforts, a fact the GAO says played a key role in reducing the USAF’s estimated price for its proposal. As bidders line up for a host of new USAF contracts, upfront investments by contractors are essential.

It is fair to say that Boeing did not like how the USAF evaluated both proposals on cost. Boeing quibbled over which historic programmes should be used as the baseline to forecast production costs on LRS-B. According to the GAO, Boeing submitted cost data based on derivative programmes, but the USAF preferred clean-sheet aircraft developments. Boeing sent the USAF a rebuttal, but apparently used inaccurate labour cost data, which, the GAO passive-aggressively notes, “did not enhance the credibility of Boeing’s estimate”.

Despite Boeing’s multiple objections, the GAO laid out a clear case that the USAF stuck to the letter and spirit of the evaluation procedures.
Game Over: GAO Protest Reveals Cost Was Deciding Factor in B-21 Contest
The Air Force in October 2015 awarded Northrop the contract to develop and produce its newest bomber, now designated the B-21 Raider. Northrop beat out a Boeing-Lockheed Martin team for the two-pronged contract that covers the engineering, manufacturing and development phase of the program as well as the first five low-rate initial production lots.

According to the GAO decision, Boeing argued that the Air Force did not effectively measure the risk of Northrop’s bomber. The company contended that if the service had followed definitions set in the request for proposals, Northrop would not have met four out of seven unnamed technical capability subfactors. Boeing also stated that Northrop’s proposal was “inherently high risk” with regard to certain requirements in a way that should have rendered its offering unacceptable.

GAO shot down those claims, saying its review found the Air Force evaluated Northrop’s bid in a way that was “reasonable and consistent” with the RFP.

Boeing also alleged that the service overestimated the price of its own offering and relied too heavily on independent government estimates. Again, the GAO disagreed.

“We see no error in the Air Force’s rejection of supporting cost data presented in Boeing’s proposal, or its upward adjustment to Boeing’s proposed EMD costs,” it wrote.

The office noted that both Northrop’s total weighted price and total estimated price were lower than Boeing’s. Although Boeing calculated that its proposal price had been overestimated, the decision noted, even if Boeing’s proposal was adjusted by that figure, it would have not been enough to topple Northrop, which would have nabbed the contract on the basis of its lower total weighted price. Thus, GAO said Boeing could not demonstrate that the Air Force had demonstrated competitive prejudice — a situation where the company would have won the contract if not for the government mismanagement or wrongdoing.

the decision sheds light on many interesting aspects of the competition. After the companies submitted their proposals to the Air Force in 2014, the service found both offerings technically unacceptable and held eight rounds of discussions where the competitors worked through deficiencies, although the GAO noted that some risk still remained with each proposal.

Those discussions failed to resolve questions about ​both Boeing and Northrop’s cost estimates for the EMD phase of the program, which Air Force found to be overly optimistic when compared with its own independent government estimates. Even after eight rounds of talks, neither company was able to put forward a proposal that could be considered realistic with respect to the majority of the cost categories.

But while Northrop increased its own estimates, Boeing kept its own cost data at the same level, the GAO said. And, partially because Northrop offered to pay for certain expenses internally on its own dime, the company was able to keep EMD costs below Boeing’s throughout the duration of the discussion process.
How the Air Force's $55B bomber contract became an LPTA competition
Information on the bomber program is apparently a touchy subject for the Air Force, which has steadfastly refused to release the value of Northrop Grumman’s bid. The $55 billion price is based on price estimates prior to the competition.

U.S. Sen. John McCain, chairman of the Senate Armed Services Committee, has been especially vocal with his criticism that the contract is a cost-plus contract and subject to overruns that the government will be on the hook for. He has threatened to withhold funding for the bomber.

To be fair to the Air Force, initial development of the first 21 planes is cost-plus, but once the craft moves into full production of up to 100 planes the contract switches to fixed price.

In a footnote, GAO describes how Northrop’s engineering and manufacturing development costs were significantly lower than the Boeing-Lockheed proposal because of investments Northrop had made but did not pass on to the government. What those investments were is redacted from the decision and Northrop declined to comment.

Northrop also had lower labor rates and labor escalation rates. Northrop also declined to comment on how they made their labor rates lower.

Because of Northrop’s investments and lower labor rates, the independent government estimates of costs for Northrop’s proposal was lower than the Boeing-Lockheed proposal.

This is significant because both teams were deemed to be technically acceptable.
The solicitation’s selection criteria stipulated that if the higher bid was greater than 103 percent of the lower bid than the lower bid would be deemed best value. The bid by the Boeing-Lockheed team was more than 103 percent so the Air Force picked Northrop.

The argument is that this is best value because why should the Air Force pay a higher price if both proposals were found technically acceptable?

As GAO said, Northrop’s price “created a near-insurmountable obstacle to Boeing’s proposal achieving best value.”

Saturday, October 29, 2016

Good enough for government work

Pentagon Pleads With Contractors to Step Up Fight Against Industrial Espionage
It is a wide open secret that the Pentagon’s complex supplier base has become a huge target. The Pentagon’s nightmare scenario: An orchestrated campaign to not only sabotage U.S. weapon systems but also steal sensitive design data from American companies. “We see growing opportunities for bad people to get at our products,” said Undersecretary of Defense Frank Kendall, who oversees weapons acquisitions.

The security gaps have widened over time, resulting from a combination of economic and technology trends — the globalization of electronics supplies and proliferation of counterfeits, the internet of things and the widespread use of software in military systems. The prospect of malicious tampering has become all too real, said Kendall. “What is my greatest fear? That we’ll find one day when we ask our systems to do something, they won’t work.”

These issues fall under the broad category of “supply chain security,” and they have put the Pentagon in a tight spot because it has limited visibility and control of the vast web of suppliers that design and produce equipment for the military. The security gaps have widened over time, resulting from a combination of economic and technology trends — the globalization of electronics supplies and proliferation of counterfeits, the internet of things and the widespread use of software in military systems. The prospect of malicious tampering has become all too real, said Kendall.

But only in recent years has the Pentagon seen substantial data and evidence of cyber attacks, tampering and other nefarious actions aimed at the defense industry. Without naming names, Kendall said there are mounting concerns about “things that are hidden in the things that we buy.” The Pentagon is taking steps such as increasing cybersecurity training for procurement officials and is trying to raise awareness of the risks, but the overwhelming responsibility for preventing and catching bad actors falls on contractors, simply because they are the first line of defense.

Dan Payne, director of the Defense Security Service, an agency that oversees industrial security, said suppliers are stepping up voluntary reporting on suspected spying. The defense industrial base is “facing a changing threat, one we’ve never faced before, a counterintelligence threat that is unprecedented in our history,” he insisted. “It’s bigger than anything we’ve ever seen.” And it’s all happening behind the scenes,” he said. “We’re in a knife fight and most people don’t know it.”

The DSS is rethinking its internal processes for dealing with industrial espionage. Many of the agency’s methods have not changed since the Cold War, said Payne. “We’re looking at prioritizing technology we truly need to protect, and looking at the companies that are producing those technologies,” he added. “Knowing how enemies are coming at us, we are working with industry on tailored security for each facility.”

In this frightening environment, Payne told executives at the Bloomberg forum, “We have to partner with industry. The nation’s top corporations can afford to spend a lot of resources vetting suppliers, but the majority of defense vendors lack such means. The U.S. government doesn’t have the resources to fight this battle alone.”

One way foreign actors can access U.S. defense industry products and data is by buying up companies. This is a “huge issue,” said Payne. “We’re never gong to be able to guarantee the supply chain 100 percent, it’s too vast.” As globalization has taken over the economy, foreign intelligence services are using businesses to get inside our supply chains to steal our secrets, our technology.”

With a globalized work force, there is a higher risk of “insider threats” that can be even harder to tackle than digital intrusions. “At no time have our adversaries ever had the access and the ability to come from different avenues as they do right now,” said Payne. “The Chinese are very good.” Having cornered 56 percent of the consumer microelectronics industry, the Chinese are in strong position to woo U.S. companies to partner with them. “This is tough one,” said Payne. “Never before have we seen the volume of joint ventures getting into our supply chain.”

The Pentagon admittedly has limited weapons to fight back, but it is slowly gearing up, said Kristen Baldwin, acting deputy assistant secretary of defense of systems engineering. “We understand security, but it’s not in our practices and processes to think about that,” she said. “We worry about quality and reliability.”

Defense program managers have to prepare to cope with counterfeit parts, malicious tampering, reverse engineering and infected software. And as much as the Pentagon needs contractors to share information about potential threats, she said, the government also needs to be more transparent with the industry.

Baldwin suggested the answer might be to rethink how weapon systems are designed so they are less vulnerable to single points of failure. “We should think about not only where the part comes from but also whether we need to design our systems so they are not completely degraded just because we don’t know what’s in that black box.” There is no way to guarantee the performance of every single component, she said.

The Pentagon funds a small number of “trusted foundries” that produce sensitive microelectronics for exclusive government use. But the majority of electronic components found in military systems come from commercial suppliers. “The fact is that we can’t afford to shut ourselves off the global supply chain nor do we want to,” Baldwin said. “That’s technology we need for our systems.”

Read more of the story at the link above.
I was interested in the comment, "The Pentagon funds a small number of “trusted foundries” that produce sensitive microelectronics for exclusive government use." It reminded me of the early years of government contracting in the United States, up to the early 20th century. My perspective of that was informed by the excellent book, "A History of Government Contracting" by the esteemed practitioner and professor, James F. Nagle. See a review of this book here.

As I recall what he wrote, in the earliest days of manufacturing, the US government took to making its own things because there was no defense industry, as such, to speak of, and what industry there was had not mastered the process of making and assembling interchangeable parts. 

Nagle expressed the observation that the government's products, made in its own "trusted foundries", were widely admired and sought around the world. Today, we take the phrase, "good enough for government work", as a cynical statement that government cannot make anything worth its salt. But, back then, when the phrase was first used, it was an admirable statement of the gold standard. If a private supplier could lay claim to have products or services "good enough for government work", he or she could proudly peddle products any where in the world.

In a day when government is intent on outsourcing everything to private contractors, who very often have foreign ownership or other influence, we might find it useful to more often rethink the gold standard.