When Commercial Off the Shelf became a Cockup Off the Cuff

The Project On Government Oversight (POGO, as it is called) has an interesting, and somewhat disturbing, report out. This post will only go into parts of it. The whole report is well worth the read. Read it at the link below.

The Pentagon relies on the obscure Defense Contract Management Agency (DCMA) to negotiate and administer $5 trillion contracts across the Defense Department as an average of $455 million In taxpayer dollars are paid out each day to contractors. DCMA undertook to modernize its procedures and processes and contracted professionals to design and build a system. The result was a software system created to help review, implement, and track defense contracts a, a project, called the Integrated Workload Management System.

The project appears to have been a colossal cockup. But that, and the investigation it appears to have instigated, is not what this post is focused on. For that story, you must read the POGO report at the link above. The bouncing ball that traces this post is a golf ball that seems never made it onto the fairway; it was in the weeds from the gitgo. This is a tale of “Do as I say, not as I do”.

Pentagon’s Contracting Gurus Mismanaged Their Own Contracts

 In 2011, the agency got the ball rolling with a contract paying a company called Apprio to conduct a study on what a “Model Contract Management Office” would look like and to “identify relevant technology” it would use. The next year, Apprio’s contract was expanded to envision a replacement for the Electronic Document Workflow system.

Things started going south for the software project in mid-2013, when Apprio won a contract worth more than $3 million to begin testing and developing software as the replacement system. But because the agency had previously hired Apprio to help lay out the requirements for this work, under federal acquisition regulations the company was ineligible for contracts implementing its prior recommendations. Regulations specifically prohibit this so that a contractor is not tempted to misrepresent the needs of the agency in order to sell more of its own products or services. The “organizational conflict of interest violation” raised “serious concern over contracting practices and processes within DCMA.”

Because the contract involved spending more than $1 million on a system the Defense Department uses to manage its resources, then-Director of Information Technology Haynes needed approval from the Pentagon’s deputy chief management official. The official rejected Haynes’ initial request, citing missing documentation and other flaws, and asked him to resubmit it. Despite not having the Pentagon’s approval, the contract was awarded to Apprio. But during testing over the next several months, Apprio’s software “failed to properly integrate” with the agency’s other systems.

The agency turned to another company, Discover Technologies, to develop a software solution. It appears that the documents provided to the Services Acquisition Review Board to get approval for the contract were misleading. The documents, submitted just two days before the end of the fiscal year, listed the upcoming year’s projected expenses as $960,000. There was no mention of the estimates that the contract would likely cost up to $40.5 million over its lifetime. Evidently, the Pentagon had not approved the funds necessary to cover that much larger estimate. In the event, the board received and approved the contract on September 28, 2013, and reapproved it each year through 2017.

Additionally, the board failed to conduct a formal review of the Discover Technologies contract before approving it. It didn’t seem to know what the contract was intended to deliver. Personnel consistently did not understand what was being communicated by Haynes and others in the IT department, and therefore either stopped asking questions or failed to ask any at all. In the absence of any questions or objections, approvals were essentially rubber stamps, with the board approving 95 percent of IT submissions on first attempt.

If it had done a thorough review of the Discover Technologies contract before approving it, the review board might have caught numerous problems. For example, the agency used the wrong type of contract: a “Blanket Purchase Agreement,” which is intended for recurring needs for straightforward supplies or services, not the type of complex software modifications Discover Technologies would be performing. The agency mischaracterized the software as a “commercial off-the-shelf” product, which requires less oversight, despite the fact that those involved knew it required a significant amount of coding and development work. The contract’s requirements were also vague, with some overlapping with work already assigned to Apprio. In many cases, task orders within the contract were missing key components, such as statements of work and standards by which to measure performance, and the document detailing the work requirements didn’t include a list of specific objectives.

On the last day of the fiscal year, two days after the review board approved the Discover Technologies contract, the Pentagon approved spending about $6.3 million on the software project over the next year. Hours later, the agency awarded the contract. It appears there was “pressure in contracting to get contracts awarded at year end,” leaving insufficient time to plan and properly craft the project’s requirements. In summary, some of the project’s most significant problems stemmed from the structure and administration of the contract. The lack of clear objectives in the contract directly impacted performance, and the lack of planning and strategic vision led to money being wasted through duplicative work and cost overruns.

Worse, the government did not provide any oversight focused of the project. There were “essentially two budget offices with a separate one in IT, and there was no oversight of the IT budget personnel by the [agency] budget office. This meant the agency’s own budget office didn’t know the agency was spending more money than it was authorized to. In a similar vein, Pentagon budget officials didn’t adequately keep track of the numbers or talk to each other, so one office kept giving away more money than the other had authorized.

The project had become a runaway train until the agency director put a halt to things and requested both an Inspector General audit and an independent investigation into the suspected Antideficiency Act violations. By then, the agency had spent around $45 million on the project, not including government labor costs.

In 2009, the congressionally created Commission on Wartime Contracting wrote, “DCMA is not aggressive in motivating contractors to improve business systems,” which it described as “the first line of defense against waste, fraud, and abuse.” The agency’s “conservative approach results in little, if any, motivation for contractors to improve their business systems, and ultimately has a direct impact on the warfighting mission.” In 2011, the Government Accountability Office attributed many of the agency’s struggles to “a seriously eroded workforce” stretched thin by the surging number and value of contracts in prior years due in part to the wars in Iraq and Afghanistan; a decentralization initiative that led to inconsistent guidance and practices across the agency that one official called a “free for all”; and the challenges posed by defense contractors’ increasing reliance on subcontractors.

While the agency has in many cases not been zealous enough in protecting taxpayer interests, the shortcomings are not across the board, and parts of the agency have at times seemed more willing to hold contractors accountable. The agency’s hard-hitting findings that Lockheed Martin had used a significantly flawed business system for the F-35 program, and the Pentagon’s subsequent willingness in 2012 and 2013 to withhold some payments from the company, is one example. Last year, it did the same with helicopter manufacturer and major defense contractor Sikorsky.

But the extent to which the agency was failing to properly manage contracts for even its own internal systems is coming into focus this year with the April Inspector General report and the documents POGO obtained.

As mentioned above, this post presents only part of the story, the mistakes made. There is another story in the article about the investigation(s) and information obtained by POGO regarding the project and loosely related others. Here, I focus on what went wrong. The rest of the story focuses on the investigation and remedies. And that's the main point of the procurement system.

While we're here, let me put in a plug for the Project On Government Oversight. Our procurement system requires the essential efforts of the private sector to police government spending in real time. POGO is one of those many sentinels along the watchtowers we rely on to keep the game clean, as best we can.

Crikey! Wot a rort!

I remind my reader to click the links to the articles presented and read the originals, as I slice and dice the material for didactic purposes in order to try to present a "teachable moment". These posts are mostly to be considered as hypothetical procurement case studies, not news or other literary content, and omit, paraphrase and rearrange a lot of original material. You've been warned, again.

Allegations of systemic fraud sparked Defence Department internal audit

Confidential documents drafted by a senior defence department investigator reveal allegations of systemic fraud spanning several years inside the government's biggest spender. The 10-month investigation, which finished in February this year, was prompted by an anonymous disclosure about fraud and corruption made to the department in April 2016.

One of the most concerning aspects involved the department awarding companies contracts without a competitive tender process and only a flimsy justification they met "value for money" requirements. In other cases the department was unable to tell whether a contract breached procurement rules or not because important paper work could not be found.

In 2015-16 the Department of Defence reported the largest yearly contract spend of any agency within the public service. The department dialled-up a bill of $30.5 billion on contracts, amounting to 54 per cent of total government contractor spending.

The investigation raised serious questions about the department's use of "single source" tenders, where a single company is awarded a contract without having to compete against other providers. "It is questionable whether true value for money is achieved when [redacted] continually conduct single source limited tenders," Dr Clarke wrote. "Whilst there is less administration and quicker decision making with this approach, it provides limited opportunity for Defence to achieve the best possible outcome. "Single source limited tenders increase the risk of contractor underperformance and corruption."

Defence spending data unreliable, incomplete, national audit office says

Transparency and accountability for billions of dollars of annual defence spending remains suspect despite recent reforms, the Australian National Audit Office (ANAO) has found.

Last year, the Defence Department spent $8.3 billion on keeping its equipment in working order, known as "sustainment" in military jargon. Yet, the audit office found that despite small recent improvements, information about where that money went and whether it was being spent wisely was often unreliable or not available.

The report also questions a claim from Defence that reforms to its sustainment policies had saved $2 billion. "Defence has not been able to provide the ANAO with adequate evidence to support this claim, nor an account of how $360 million allocated as 'seed funding' for Smart Sustainment initiatives was used," it read.

Auditors were also critical of inconsistencies between figures given to the Government during the budget process and those provided in the department's annual report. "It's absolutely not good enough," Andrew Davies, director of defence and strategy at the Australian Strategic Policy Institute, told AM.

Oz military megahack

An Australian Signals Directorate (ASD) presentation to the Australian Information Security Association (AISA) conference yesterday detailed the hack. Suffice to say that a medium-sized defence contractor was breached and gigabytes of aerospace data and commercial arrangements for military aircraft and naval vessels were delivered into the hands of the attackers. The ASD used it as a case study for the AISA conference yesterday.

The government has since said the information was commercial-in-confidence, but not classified. This is not an isolated incident: in Australia, as elsewhere, attackers thwarted by a network's defences then seek out third-party contractors as an easier mark.

This suggests a problem in sub-contractor oversight – you can win a government contract without proving you have adequate network security.

Minister for Defence Industry Christopher Pyne seems to agree. This morning, he told Radio National's Breakfast programme that the government can't be held responsible for a contractor's lax security.

Fat and mismanaged public sector is eating us alive

In a Crikey article, carried by the Community and Public Services Union, Eric Beecher chronicles appalling mismanagement in service delivery.

Then there’s the $11 billion spent by the Defence Department managing 119 bases around Australia which the ANAO says is well in excess of the $9.3bn “expected value” of the 10 services contracts, signed in 2014, to do the work. The department has defended its performance, saying the vast project to renegotiate the contracts has delivered value for money, when considered against increased service demands and changing expectations of the ADF. Yet a new $120 million IT system, meant to manage contracts ­between Defence and the private companies servicing the bases, was $39m over budget and five years late.

There’s also the flawed tendering and contracting processes overseen by the Immigration ­Department, which resulted in the waste of “tens and possibly, hundreds of millions of dollars”. Given these practices were subject to a scathing ANAO report, they could hardly be ignored.

We’re reminded of last year’s Australian Bureau of Statistics census “stuff-up”, the Australian Taxation Office’s massive and damaging IT outage, the Department of Health’s decade-long mismanagement of e-health records, and the embarrassing release of identifiable Medicare information. There’s also the Department of Finance’s lax oversight of ministerial travel arrangements. But not raised is the $576m public service travel bill — a blowout of $75m in just four years.

While this shocking record is acknowledged, Beecher argues the blame lies mainly with outsourcing to powerful private contractors.

Outsourcing failures expose weaknesses in both government and business

The problems of dealing with private sector providers and contractors are a persistent theme in the analysis of government shortcomings. For example, recent Australian National Audit Office reports highlighted contracting problems in Air Services Australia, the Defence Department and the Immigration Department. Contract management issues were at the heart of last year's failed online census and have been a constant factor in the turbulent administration of Australia's controversial offshore detention centres. Over-reliance on contracted consultants was a major cause of the botched home insulation scheme.

Given the extent to which governments rely on private contractors for a large range of goods and services, it is unsurprising that contractors are often in the frame when things go wrong. But many of the recurring issues arise out of factors specific to the contracting process.

A common complaint is that the use of contractors has caused agencies to run down their in-house expertise and technical resources. As a result, it can be argued, agencies lack the capacity to assess whether the contracts they are agreeing to give the government and taxpayer adequate value for money. Without their own professional judgment, grounded in technical knowledge and practical experience of the area in question, public service managers are ill-equipped to decide matters of all-round quality. Instead, they tend to fall back on generic checklists of assessment criteria that emphasise easily specifiable factors, such as cost and timeliness.

Alternatively, if funds allow and time permits, they may contract in an external consultant or commissioner to give an expert opinion on a proposed contract. But such advice carries the risks of perverse incentives attached to all forms of external contracting and consulting. The consultants' objective is to gain future contracts, which encourages them to say what they think governments want to hear in preference to what they ought to hear. Once again, without the professional judgment to tell the difference and without their own in-house, trusted staff to advise them, public service managers are at the mercy of self-interested outsiders. This vulnerability is compounded by the lack of transparency that surrounds contracting. Overuse of commercial-in-confidence provisions has shielded public servants from the bracing effects of public scrutiny.

The lack of in-house capacity can affect not only the initial process of drawing up contracts but also the oversight of how contracts are implemented. However, as the constant stream of scandals illustrates, many commercial providers are more interested in profit than in good service and cannot be trusted to do the right thing. As a result, governments are being driven to impose tighter controls and regulations. Even then, in the face of determined rorting and corner-cutting, most government agencies lack the resources to prevent opportunistic contractors from wrongfully expropriating public funds.

After two decades of wholesale outsourcing, some general conclusions are clear. Contracting out is an efficient and effective alternative to in-house provision where the objectives are clear and easily monitored, and where there is a competitive market of alternative providers. It also works well for more complex services where providers can be trusted to pursue public-interest objectives for their own reasons. However, where these conditions of either simplicity or trust do not apply, the risks that governments will not receive value for money start to build. Moreover, extensive experience with outsourcing has itself compounded these risks by reducing governments' capacity to effectively draw up and monitor outsourcing contracts. Some complex service contracts that could have been safely contemplated a generation ago are now beyond the professional expertise of public servants to administer.

politicians need to recognise that outsourcing complex government services requires the development of trust between the parties, which means looking beyond the short-term bottom line and not always preferring the cheapest option. In addition, successful contracting depends on well-resourced government agencies with the skills and experience necessary to manage ongoing relationships with contractors. Running down government staffing levels while relying more on private contractors is a recipe for continuing policy failure.

Contractors, for their part, must earn the right to be treated as trusted partners. They must be prepared for the long haul and willing to learn from experience. They must also be ready to submit to the level of public scrutiny and accountability that public servants take for granted. Indeed, given that the commercial private sector is not imbued with the same commitment to serving the public interest, there is a case for subjecting private contractors to more scrutiny than the public service, not less.

California procurement database found to be off base

California Audit Report 2016-124, Department of General Services and California Department of Technology

Among the key findings: General Services does not have complete and accurate contracting data, and it did not implement controls to avoid these shortcomings with its contracting data.

The previous contract and procurement database system used through 2015 had severe limitations—we found many key data entry errors, and more than a third of the contracts and amendments we reviewed were missing from the system, including one with eight amendments worth $163 million.

Of the 27 approved noncompetitive requests we reviewed, nine lacked justification for bypassing the competitive bid process and 14 did not demonstrate that the vendor’s prices were reasonable.
Among the highlights of the report:

• General Services and Technology did not provide adequate oversight of the billions of dollars state agencies awarded through noncompetitive contracts from fiscal years 2011–12 through 2015–16.
vices did not ensure that a statewide contract database contained complete and accurate information about the State’s contracts for use by key decision makers.

• Although General Services transitioned to the new Financial Information System for California (FI$Cal) as its statewide contract database, it is unclear if FI$Cal will fully solve the State’s lack of comprehensive contracting data.

• Neither General Services nor Technology has established formal plans to regularly analyze the new FI$Cal data to identify instances of abuse or misuse of statewide noncompetitive procurements.

• General Services and Technology approved noncompetitive requests that lacked adequate justification for bypassing the competitive bid process, such as demonstrating that it conducted market research to substantiate that no competition existed.

• Nine of the 27 noncompetitive requests we reviewed could have been avoided if the agencies had engaged in sufficient planning.

• Although both General Services and Technology have enforcement mechanisms, they rarely employed them, allowing agencies to continue inappropriately using noncompetitive requests.

Billions in no-bid contracts mismanaged, state auditor says, By Adam Ashton (Excerpts; read full report at the link)

It didn’t take long for the cost of a technology contract in California’s unemployment office to increase twelvefold.

Two changes to the contract – added without bidding – swelled the deal to $8 million within a year. Then, the Employment Development Department submitted a request to add another $2 million worth of work to the arrangement without soliciting new bids from other companies.

That project is one of nine that State Auditor Elaine Howle highlighted in a new report released on Tuesday that urges California government to be more cautious in awarding high-value contracts without seeking competitive bids.

The report estimates that the state spent $44 billion on noncompetitive contracts worth $1 million or more between 2011 and 2016, a substantial sum that auditors said underscored the need for better management.

“The sheer magnitude of the value of the state’s noncompetitive contracts during this period emphasizes the importance of ensuring that the state provides adequate oversight of agencies’ contracting practices,” the report says.

State rules allow departments to award contracts without bidding in emergencies and under other special circumstances. But Howle’s auditors found that the state departments in charge of monitoring spending – the Department of General Services and the Department of Technology – have missed opportunities to challenge requests for noncompetitive contracts, failed to ensure that contract databases have accurate information and rarely disciplined other government agencies for misusing noncompetitive contracts.

The audits were based in part on a sampling of 27 noncompetitive contracts that state departments awarded over five years. Nine of them should have gone out to bid, auditors wrote.

Examples included:

▪ A $3 million contract extension that the California High-Speed Rail Authority presented just 17 days before its existing contract was scheduled to expire. High-Speed Rail did not describe why the vendor it chose had unique services that merited a noncompetitive contract.

▪ An $835 million noncompetitive contract amendment in 2013 for the company that manages Medi-Cal dental benefits. It was the seventh amendment to the original contract.

▪ A $75.5 million noncompetitive contract extension at the Department of Motor Vehicles on top of what was a $62.8 million for work on the state’s driver’s license production system.

▪ A fourth amendment to a Cal Fire aviation contract that was worth $27.8 million.

One $163 million contract that was missing from databases highlighted shortcomings in the state’s accounting system. It was the eighth change to a contract from the Department of Developmental Services, and no one entered it in the program the Department of General Services uses to follow spending.

State government is in the midst of a major overhaul of its accounting system with departments gradually adopting a new program called the Financial Information System for California (FI$Cal). When it’s in full use, the Department of General Services and the Department of Technology should be able to follow instantly any contract awarded by a state entity.

Until then, different state departments are using a hybrid system for accounting. Most use the system that FI$Cal is replacing; about a third of them use FI$Cal.

Howle’s office says it’s too early to tell whether FI$Cal will work as intended. “It is unclear if FI$Cal will fully solve the state’s lack of comprehensive contracting data,” auditors wrote.

Read more here: http://www.sacbee.com/news/politics-government/the-state-worker/article157239494.html#storylink=cpy

The anti-competitive multiplier effect of having no effective scope of contract change limitations

Canberra outsourcing deal quadruples to $390 million

The Australian Department of Agriculture signed a technology support deal with EDS in 2009 for $96 million. Since then, EDS has been acquired by HP Australia, and HP has twisted and turned and split and merged to become HPE , HP Inc, or DXC Australia.

The comprehensive managed services arrangement runs the gamut of IT services. When Agriculture took the work to market back in August 2008, it envisioned the contract would cover managed desktop, desktop LAN, midrange, storage area networks, helpdesk, Macs, and project services.

Work orders signed in December last year have now taken the value of the deal to over $390 million, more than four times its original value. And this figure is likely to keep growing until 2022 when the present iteration of the deal expires, at which point it will be 13 years old.

Despite a recent clause added to the deal which allows the department to take it back to market at any time it wants “if the performance of the services does not meet clearly defined and agreed requirements or if the value for money requirement is no longer being met”, a spokesperson for the department told iTnews there were no foreseeable plans to market-test the nearly $400 million deal.

The Department of Finance confirmed that the Commonwealth procurement rules don’t place any cap on the number or value of amendments that can be applied to a federal government contract.

"In order to ensure transparency in government procurement activities, entities are required to report contract amendments and variations on AusTender, including any increases to the total contract value," Finance said. Since 2009, Agriculture has published 227 such variations on the procurement website.

The rules also dictate “any variation to a procurement contract should not significantly change the scope of the contract”.

The procurement rules do, further, insist that “officials must achieve value for money in procurement”.

Agriculture insists it is doing so - even in the absence of any real competition. It called in procurement consultants, who calculated it would cost the agency more to run a new approach to market than it stood to save.

“The review found that the third party service provider was delivering the services to the expected level for a price that was market competitive at that time," a spokesperson said.

IT outsourcing has long been a point of controversy in Canberra, where the cost of running complex and highly regulated multi-year procurement programs often convinces agencies to stay with the same supplier for many years.

In 2015 the Department of Health switched to Datacom after 15 years with IBM.

And the Department of Defence continues to insist it is too busy to refresh its paired distributed computing deals with Unisys and Fujitsu, which are nearing the 20-year mark.

In the US, the concept of scope of the contract is taken a bit more strictly. While not necessarily determinate, a "large" price increase raises the suspicion of a change beyond the scope of the contract.

Plus, the scope of the contract is examined in the context of the contract's intent as the time it was solicited, not during some evolutionary period of the services actually performed. A comparison of the actual services presently being rendered in comparison to those actually solicited in the original contract may reveal a change in the nature, scope and character of the service of such magnitude that the government, and taxpayers, would be better served if it went back out to bid.

Also, in a rapidly changing time of technology, when the field of competition could be expected to provide newer technology at more competitive rates, the change in the field of competition can also influence what is meant by a "significant" change in the scope of the contract.

Too often, the cozy arrangements with an incumbent and a procurement staff not wanting to be bothered to "foster effective competition", as the American Bar Association Model Procurement Code mandates, results in situations like this, where there is rampant contract price inflation. No appraisal (which is what the third party review was in reality) is as tell-worthy as good old-fashioned competition. A dozen expert opinions of a horse will not tell a winner from a loser better than the race.

Contract administrators must not only monitor the services rendered and paid for, they must also monitor the services contracted.

It's not what's up front that counts

Long ago there was a cigarette manufacturer who advertised its filtered cigarettes with the sound bite, "It's what's up front that counts". At least as an old memory recalls it.

In procurement, it's what brings up the back that matters. Contract administration is the caboose that carries the real weight.

From Steve Kelman's Lectern, we get some excellent insight on this from ASI Government's resources, Postaward Contract Administration and Management Toolkit. I just want to highlight two of the several papers available at that link. You should read each of these two papers in full at the link provided, and access the others at the link above.

Managed Relationships, Managed Contracts

We repeat: Contracting is not the most important aspect of acquisition. The deployment of the acquired resources in support of agency operations and mission accomplish1nent is far more critical.

Postaward Contract Administration

Postaward is where the rubber meets the road, so to speak. It is during the contract administration phase that the government must ensure it gets what it pays for. Indeed, Federal Acquisition Regulation (FAR) 42.302 lists 82 separate contract administration functions. Not all contracts require performance of all 82 functions, of course, but the list does show the scope and depth of contract administration-and its importance.

Very basically, contract administration is any action taken by either the government or the contractor during the period from contract award through contract closeout. Its basic goal is to ensure the contract is performed, as written, by both the contractor and the government. It is during the contract administration phase that the government must ensure effective contract performance.

While each contract is unique, some tasks are performed on most contracts, although to varying degrees. These common tasks are monitoring contractor performance, including inspection and acceptance; modifying contracts, including exercising options; reviewing invoices and processing payments; administering government property (if any); monitoring compliance with terms and conditions (e.g., subcontracting reports and contractor code of business ethics and conduct); and closing out the contract.

Taking the cash stream out of streamlining

DCYF likely to bring some services back in-house as part of an overhaul

When Rhode Iland's financially ailing child welfare system decided to purchase most of its services from two private nonprofit networks three years ago, officials praised the new "system of care" as a model for streamlining services and cutting costs. A little more than three-and-a-half years later the continuation of the practice appears unlikely.

After years of cost overruns, Jamia R. McDonald, chief strategy officer and the agency's new de facto head, no longer believes that networks are the most efficient way to deliver services. Instead, it's likely that the agency will bring some services back in house and bid out others individually. "The theory was these administrative efficiencies could be gained by overseeing multiple activities .... The agency didn't posture itself well to manage that. We moved administrative oversight. We didn't restructure in any way in-house, and we also didn't create any oversight that ensured [the networks] delivered," McDonald said.

"When you have to change a system, I don't think you turn it off one day and turn on another. If we really want to think differently, the longer we bind ourselves into certain activities, the less opportunity we have to pivot," McDonald said.

Marty Sinnott, chief executive officer of Child & Family Rhode Island and head of the Rhode Island Care Management Network, put it more bluntly: "The contracts were poorly designed and poorly written right out of the gate. The networks have at least kept the lid on what is a poorly designed and poorly managed child welfare system," Sinnott said. "The system of care contracts are neither the problem or the solution. They have functioned under bad public policy and bad public leadership."

In 2012, the state Department of Children, Youth and Families signed three-year contracts with the two providers. The networks assign children under state care to residential and congregate care and subcontract with shelters and other service providers — and have consistently overspent their budgets. There are currently 3,095 children in DCYF care, a number that has grown over three years. (Sinnott pointed to a 30-percent increase over three years in the number of reports of abuse and neglect.) The contracts were set to expire June 30. After months of negotiations, they have been extended, but only for six months.

The fact that the DCYF appeared poised to make changes is not unexpected. In July, Governor Raimondo promised that the "dysfunctional" agency would be overhauled amid a litany of problems, including millions freely spent on contracts with no performance management, and state payment and procurement procedures that had been skirted.

The large network contracts are not the only DCYF agreements headed for change. McDonald said the agency has allowed some contracts for "redundant" services to expire, and other contracts have been reduced. "There were examples where we bought the same service two or three times, and we never used any of those vendors so there was no point in extending," McDonald said, referencing an issue highlighted in an audit of the DCYF this summer.

Steve Kelman opens the floor for discussion of contract administration

As I have previously pointed out (e.g., here and here and at the tag "contract administration"), procurement is not just the solicitation phase. It fits a tractor/trailer analogy, where the solicitation phase simply gets the thing rolling, but the contract administration stage is what carries the load. Having one or the other, or a good tractor but rickety trailer, will not get the job done.

Steve Kelman blogs on the FCW website, which primarily focuses on IT procurement, but not exclusively; many of the principles discussed on the site have application more broadly. Concluding the article below, he writes:

I suspect the government's expertise in areas relevant to contract management varies widely; my intuition is that DOD weapons systems offices have relatively more expertise, as do those in GSA managing construction contracts, while in IT the picture is very mixed at best.

However, I am more and more feeling that we really need to get a discussion going in this important area. So with this blog I am announcing that I plan to stick with this issue, unless and until somebody persuades me my concerns are mistaken. And I would really like to ask blog readers, particularly those on the frontlines of the system who actually have to deal with mods and with judging contractor deliverables, to submit comments for publication in the blog's Reader Comments section with your views of the issue I am raising.

What an excellent idea, and I encourage my reader to do likewise, by joining his discussion via the link to his article presented below.  (Usual caveats, about how I tend to slice and dice articles presented, apply.)

To contract better, does government need more in-house experts?

For any major contract, contract modifications, known colloquially as "change orders" or "mods" are a way of life, and a staple of contract management. For longer-term contracts, the modified contract often ends up bearing only a small relationship to what originally was signed.

And the content of those modifications has a huge influence on a contract's success. For example, does the mod water down the original terms of the contract due to the contractor contending performance was impossible? How is the modification priced? (There is a widespread view, captured in the phrase "buy in and get well," that aggressive pricing during source selection is often counteracted by generously priced mods.)

A key competency of government procurement contracting officials should be proficiency in evaluating the product or service the contractor submits -- since problems in that area can often lead to major modifications. The procurement system's general bias toward the front end of the process -- source selection and (to an extent) acquisition strategy -- at the expense of back-end contract management, ties into the cultural predisposition to emphasize getting funds "out the door," compared to paying attention to what happens afterwards.

Recently many industrial companies have started buying major subsystems, or even finished manufactured products (especially IT hardware) from contractors. An IT hardware company buying subsystems, or a financial services company buying IT services, would never think of entrusting management of the relationship with their vendors to employees who were not subject-matter experts on what was being bought.

It is my impression that very little attention in writing or training about procurement is devoted to managing contract mods. What little there is, I would guess, centers on the bureaucratic and legal procedures for mods presented in Part 43 of the Federal Acquisition Regulation. And unlike, say Part 15 on source selection, Part 43 provides no specifics for how government folks should make decisions about the change order requests that contractors submit.

If government is going to do a good job contracting, it needs to move enough work in-house so that agency employees can develop sufficient subject-matter expertise. How could an IT hardware firm dealing with contract manufacturers designing and producing major subsystems get a good deal if their own in-house folks didn't have the knowledge to make good judgments about whether production delays were justified or not, whether specs needed to be loosened, or whether prices proposed by the vendor for changes the customer wanted were reasonable?

Yet my strong suspicion is that government officials dealing with contractors frequently lack these kinds of expertise. If true, it's a recipe for disaster. Successfully managing change orders (and evaluating the quality of contractor deliverables) may require some in-house "doer" work to get government folks sufficiently expert to manage.

I could be wrong and please correct me if I err, as I would love to know I'm mistaken on this.

It will be interesting to see how this unfolds.

Charity begins at homage?

Click links to articles.

Longtime USAID contractor embroiled in scandal fires top managers, others

International Relief and Development Inc., once one of the largest nonprofit contractors working for the U.S. Agency for International Development, has dismissed its board of directors and laid off 21 employees in an effort to stabilize the struggling organization, senior managers said Friday.

The managers are trying to lift a Jan. 26 suspension issued by USAID, preventing the nonprofit group from receiving federal work. The agency reported that it had found evidence of “serious misconduct” at IRD, including allegations of unchecked spending and mismanagement in humanitarian and stabilization programs, many of them in Iraq and Afghanistan.

Since 2007, IRD has received nearly $2.4 billion to administer USAID-funded programs.

Nonprofit contractor sent government $1.1 million bill for parties and retreats

The largest nonprofit contractor working for the U.S. Agency for International Development during the height of the wars in Iraq and Afghanistan billed the government $1.1 million for staff parties and pricey retreats — three of them held at one of the poshest destinations on the East Coast, Nemacolin Woodlands Resort in Pennsylvania.

Attendance was compulsory, and more than 100 IRD employees went to two of the mountain retreats. Among the perks they received at Nemacolin: private rooms; open bars; gala dinner parties; free iPods at one retreat, Nikon Coolpix cameras at another; skeet-shooting outings at the resort’s Field Club; extreme-driving classes at its Jeep Off-Road Driving Academy; and complimentary $50 gift certificates to spend on clothing, jewelry, massages — whatever the employees wanted.

“It was scandalous,” said Andrea Clarke, IRD’s former media and communications officer, who attended the 2008 retreat. “I remember thinking, ‘We’re dealing with issues where people are actually dying overseas, and here we were at this five-star resort and we are living it up.’ There were alarm bells going off every day. It was no way to run a nonprofit.”

In January, USAID suspended IRD from receiving any more federal work, citing other spending that involved “serious misconduct.”

The couple who presided over IRD — Arthur B. Keys, an ordained minister, and his wife, Jasna Basaric-Keys — retired from the nonprofit last summer. Attorneys for the couple have denied any wrongdoing, saying, “Dr. Keys made sure that things were charged correctly.” A new chief executive, Roger Ervin, took over at IRD in December and has forced seven of the nonprofit group’s longtime officers to resign and removed its board members. The nonprofit’s annual revenue from USAID has plummeted from $587 million in 2010 to $78 million last year.

IRD was one of the biggest beneficiaries of U.S.-financed projects in Iraq and Afghanistan designed to rebuild the countries and quell insurgencies after the U.S. invasions. Of the more than $2.4 billion IRD has collected from USAID since 2007, 82 percent went toward projects in the battle zones. “It was heartbreaking,” said one former IRD employee who attended the Nemacolin conference and spoke on the condition of anonymity because of the ongoing investigations. “We had all of these people working on programs in Third World countries, and then there were all of these people trying to get as much money as they could out of the programs.”

For departing USAID administrator, Afghanistan is rarely mentioned

Despite $100 billion and counting in reconstruction funding from the United States since 2001, Afghanistan has rarely rated a mention by Shah, particularly during his last year. With USAID’s Afghanistan projects fraught with graft, questionable spending and corruption by Afghan contractors and some major U.S. partners, the agency has struggled to prove its programs’ success and justify continued U.S. government spending in the war-riven nation. During his five years at USAID, he has made three visits to the region, according to the official agency website.

For years, John Sopko, the top U.S. government official tasked with oversight of spending in Afghanistan, and his staff at the Congress-appointed office of the Special Inspector General for Afghanistan Reconstruction (SIGAR) have attempted to verify USAID’s spending on development programs in that country. He says he has been routinely frustrated by the agency’s inability to specify initiatives that have worked.

“I said, ‘Can you point to any program? Is it better to put money into building schools, or was it better to hire teachers, or was it better to train?’” he says. “The American taxpayer deserves an answer. Congress deserves an answer.”

Last year SIGAR concluded that the success of USAID’s spending on women-related projects in Afghanistan could not be evaluated because the agency was unable to identify which portions of programs specifically related to women.

The eyes of Texas are not on its procurement system -- yet?

As is customary with this post, you must read the mentioned article. I tend to cut, paste, rearrange, paraphrase, leave out important stuff and otherwise use the material for didactic purposes, not literature, legal or otherwise. 

For instance, in the following article there is a catalog of big-name contractors (e.g., Accenture, Xerox, IBM) and big money contracts that went awry that are mentioned. You may find reading about those much more interesting and juicy than reading the about the context in which they went awry.

In Texas contracting, failure is an option

For two decades, Texas has pursued a wave of privatization of public functions with the belief that corporations could save taxpayer money while improving the delivery of essential government services. But multiple contracts representing billions in public dollars have blown up in the state’s face, leading to lawsuits, ethics investigations, wasted funds and frustrated Texans.

The pattern that emerges is one of famously business-friendly Texas repeatedly fumbling its efforts to hold the businesses it hires accountable.

Dozens of audits going back to the 1990s have found similar problems with contract management and procurement across a wide stretch of state agencies. And conflict of interest questions similar to those now dogging the 21CT deal have periodically emerged over other state contracts.

“I think it’s gotten worse rather than better in terms of the oversight, the accountability and making sure that people aren’t taking advantage of the contracting process,” said state Rep. Sylvester Turner, D-Houston, who has been critical of privatization efforts since joining the Legislature in 1989.

“My observation over the years is we have often entered into contracts that may not have been in the best interest of the state, and we try to overcome it by managing them poorly,” said Carl Isett, a Republican state representative from Lubbock from 1997 to 2010 who worked on contracting issues and is now a lobbyist. “It’s just the recurring theme.”

While contracting problems have arisen in nearly every corner of state government, including foster care, standardized testing and border security, Texas’ highest-profile disasters have coincided largely with big information technology projects that come in over budget, behind schedule or both.

In 1991, the Texas attorney general’s office signed an $11 million contract to computerize its child-support payment system. By 1997, the deal with Andersen Consulting had ballooned to more than $68 million and was three years behind schedule. A state audit found that the company deserved a share of the blame for overpromising and underperforming.

A decade later, Andersen Consulting had renamed itself Accenture and was in the crosshairs of Texas law Poorly trained personnel and technical problems led to a series of well-publicized snafus, including applicant backlogs growing by thousands and misinformed workers denying benefits to eligible families. Texas ultimately paid Accenture $244 million and canceled the contract.

Despite the two high-profile flubs, Accenture’s relationship with Texas appears stronger than ever. The company is in charge of most of the state’s Medicaid claims processing, as well as a $99 million upgrade of the attorney general’s child support payment system, two areas synonymous with its past missteps.

State Rep. Garnet Coleman, D-Houston, who was first elected in 1991, said he would support temporary “freeze-outs” from future bidding by companies that have been shown to handle past contracts poorly. Yet more important than holding vendors accountable, he said, is boosting the state’s resources so that agencies aren’t outgunned when dealing with the private sector.

“The only way to do outsourcing properly is to have enough people working on the agency side to do appropriate oversight of the company that has the contract,” Coleman said. “What we don’t want is the tail wagging the dog, which is what usually happens.”

Coleman recalled being in the Legislature in the 1990s, when “outsourcing” emerged as a buzzword, coming up constantly in hearings and policy proposals. Texas was drawing national attention for its efforts to transfer responsibilities onto the private sector, which Republican lawmakers predicted would lower costs while producing a reliable, efficient and technologically sophisticated delivery of services.

In 1997, under Gov. George W. Bush, the state began taking bids to outsource the state’s welfare, Medicaid and food stamp programs, predicting that doing so would save the state at least $10 million a month. The concept, viewed at the time as the most ambitious privatization effort by any state, fell apart after President Bill Clinton denied Bush’s request for a waiver from federal rules requiring that government employees handle much of that work. Bush accused Clinton of siding with politically powerful labor unions over good policy solutions.

The setback slowed, but didn’t stop, Texas’ march toward privatization. In 2003, Gov. Perry signed House Bill 2292, which consolidated 12 health and human services agencies into five and ultimately replaced thousands of state workers with private contractors handling duties like screening welfare recipients.

More than a decade later, the bill’s author and lead proponent, former state Rep. Arlene Wohlgemuth, described the bill as a success in its goal of shrinking state government and outsourcing services better handled by the private sector. Yet contracting oversight needs to be reformed, she said.

“In my opinion it is one of the greatest weaknesses of state government,” said Wohlgemuth, executive director of the Texas Public Policy Foundation, a conservative think tank. “We need to do a better job of enforcing the contract once we have agreed upon it and auditing those contracts.”

Last month, newly elected Gov. Greg Abbott directed all state agencies to follow new, enhanced contracting rules, including requiring agencies to publicly disclose all no-bid contracts, as well as a “public justification” for use of the no-bid method.

Abbott’s order is just one reaction to the health commission’s no-bid contract with 21CT, which has drawn allegations of cronyism and incompetence. Yet for all the coverage that deal has received, it is a relatively small item in state contracting. Most big contracts are for highway projects and involve organizations providing health services to Texans. And for the most part, they operate without incident.

The health plan vendors, who handle billions of state and federal dollars, deliver on time and with fewer problems because there’s more than one contractor in the region, Goodman said. If one had to be pulled, the others remain and there’s no interruption in service.

Contractors are also required by state lawmakers to be more transparent than in the past. If they’re late or are fined for performance, you can see it on the health commission’s website. The agency has also, in recent years, shortened the time it takes to go from a warning to a fine for a contractor.

“You don’t get a whole lot of warning now,” Goodman said. “You are out of compliance; you get a fine.”

“We’re prepared to throw the book after the welfare mom, but the people who are getting the $10 or $20 or $150 million contract, we deal with them in a very different fashion,” Rep. Turner said. “When there are questions raised about whether there’s been abuse of the contract, we’re not as animated or outraged.”

Discussions continue among lawmakers on what they can do this session to improve contract oversight.

I note that Guam has long required that all sole-source contracts be identified by an annual report to the legislature. It is also considering more stringent disclosure of the determinations that must be made to engage in a sole-source solicitation.

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 .

Contracting a bad case of contract management

NAO urges further government action on contract oversight From the UK

Government must do more to address "widespread problems" in how it manages contracts with private suppliers, according to new findings from the National Audit Office (NAO).

The MoJ and Home Office were among a number of departments that commissioned internal reviews of their agreements with private contractors last year after the former uncovered what is described as 'systemic malpractice' such as overcharging by G4S and Serco on its electronic monitoring contracts dating back to 2005.

Key issues identified in the report included:

•A failure across government to recognise the importance of contract management and a focus on trying to prevent errors within agreements rather than providing best possible value.
•Government being at a permanent disadvantage concerning its commercial capability compared to the private sector, with contract management traditionally being "vulnerable" to administration cuts and under-investment.
•A lack of pressure from departmental senior managers to demand visibility of contracts.
•Key figures in central government departments not taking contract management seriously as an issue.

The report is available in pdf form here.

Why won’t governments take contract management seriously? Commentary by Stuart Lauchlan

Specific criticism levelled by the NAO includes:

• Allowing the providers to ‘mark their own homework’ by relying on the information supplied by the outsourcing companies rather than carrying out their own checks.
• Lack of ownership with some government departments unable to cite which civil servant had responsbility for making sure that an outsourcing firm was honouring a particular contract.
• Government is too locked in to dealing with companies that are “too important to fail” on the basis that their collapse would cause far reaching disruption to public service delivery.
• Gaps between the numbers and capability of staff allocated to contract management and the level actually required.
• Limited interaction between finance, commercial and operational contract management functions.
• Senior management engagement with suppliers has not been widespread across government.
• A lack of meaningful incentives for innovation that inhibits shared approaches to problem solving and service improvement.
• Government is not fully using commercial incentives to improve public services with levels of payment deductions allowed by contracts are often insufficient to incentivise performance.
• Government does not have sufficient understanding of the level of risk it is retaining on contracted-out services with none of those examined in the cross-government review sharing risk registers with the contractors to ensure all understood who was managing what.

Ultimately, the NAO distills all this down to four major points:

• Failure to recognise the value of contract management meaning that it is seen as a way to avoid things going wrong, rather than unlocking value.
• Senior managers in central government departments don’t take contract management seriously with departments not adapting governance to the expanding role of government contracting.
• Lack of visibility over contracts with senior managers often only engaged on contracting issues to firefight problems and putting little pressure on teams to improve the information they rely on to manage the contract.
• Government has a permanent disadvantage in commercial capability with the Cabinet Office estimating that government as a whole deploys less of its specialist commercial resources on contract management than the private sector.

On this last point the NAO concludes gloomily:

Yet it is doubtful that the government can improve its capability to be able to have the best contract managers on all its contracts. It will not pay either to bring in or retain commercial experts to match the combined expertise of its contractors.

Reaction to the report was predicable.

Margaret Hodge MP, Chair of the Committee of Public Accounts, which is preparing its own report on public procurement, commented:

More and more of our public services are now being delivered by private companies, who between them received a huge £40bn last year from contracts funded by the British taxpayer.  These companies must be held to the same high standards as any government department, so that the public can have confidence that they are delivering the quality of service we are entitled to expect.  With so much taxpayers’ money at stake, departments must urgently put an end to the “out of sight, out of mind” mentality that has led them to be in this weakened position before even more taxpayers’ money is wasted.

Jim Bligh, Head of Public Services policy at the Confederation of British Industry, said:

The NAO is right to highlight that the Government sometimes sees contract management as an afterthought, focusing too much on getting the deal signed and too little on what will happen when the ink dries.

The Government has a sensible programme of commercial reform but progress is too slow. It needs to focus on quickly building up the skills and capabilities of the Civil Service to manage the growing complexity of contracts.  And the Cabinet Office must have the necessary levers at its disposal to make sure that Whitehall departments adopt new ways of working.

The industry recognises that it also needs to act differently.  Wider use of open book accounting would make sure that the Government has better access to financial information about its contracts with the private sector, and improve accountability for the taxpayer.

For its part, the Cabinet Office, which has been spearheading procurement reforms, commented:

The NAO acknowledge our work to overhaul government’s commercial activities which saved taxpayers £5.4billion last year alone, against a 2009/10 baseline. Compared to 2010, when there was no central grip on procurement, we are now taking a hard hitting business-like approach to managing contracts with suppliers.

As the author Stuart Lauchlan noted, this is probably pandemic.

Fools rush in where planners failed to go

Get a contracting plan in place early

For all the debate about the effectiveness of government contracting, the success or failure of programs involving government contracting is actually determined very early, often unfortunately before the contracting officer’s involvement—that is, during acquisition planning.

FAR’s Part 7 acquisition planning guidance provides a great roadmap to all the many considerations necessary before satisfying a government need via contract. The program office must take non-delegable responsibility to figure out what, why, when, where, and how they will obtain acquired resources to support their goals. This shouldn’t be another paperwork drill, completed by support contractors or the contracting officer and subsequently filed away.

Defending the FAR isn’t always popular, but it does provide clear, understandable guidance on what to consider in an AP, who to include, when key milestones should occur, and how to get there. Just about anything significant and reasonable should be considered and addressed during acquisition planning, along with any alternatives, well before requesting a contractor’s proposal. Later surprises should be few if the homework was completed beforehand. This homework includes open communication with industry to better understand the market, business trends, financing, and available technology; seeking out required expertise within the acquisition team; analyzing affected internal business processes or regulatory/policy mandates; collaborating closely with the requirements community; etc. The FAR even recommends periodically updating the AP to account for inevitable program changes.

So is acquisition planning one of those unnecessary, self-serving, bureaucratic, and burdensome requirements that slows the process and leads to poor outcomes?

The integrity, responsibility, quality, and length of acquisition planning must be part of any discussion to improve acquisition outcomes. Contracting solicitation and award processes (like most business) can go smoothly if planned well. But acquisition planning that only completes the file or occurs after the fact will result in less optimal program results. Good contracting managers are instrumental and must be included in this process, but ultimate responsibility lies with the agency, company executive, or program manager. Let’s develop the game plan before we take the field!

Far Part 7, Outline

7.000 Scope of part.
Subpart 7.1—Acquisition Plans
  7.101 Definitions.
  7.102 Policy.
  7.103 Agency-head responsibilities.
  7.104 General procedures.
  7.105 Contents of written acquisition plans.
  7.106 Additional requirements for major systems.
  7.107 Additional requirements for acquisitions involving bundling.
  7.108 Additional requirements for telecommuting.

Subpart 7.2—Planning for the Purchase of Supplies in Economic Quantities
  7.200 Scope of subpart.
  7.202 Policy.
  7.203 Solicitation provision.
  7.204 Responsibilities of contracting officers.

Subpart 7.3—Contractor Versus Government Performance
   7.301 Definitions.
  7.302 Policy.
  7.305 Solicitation provisions and contract clause.

Subpart 7.4—Equipment Lease or Purchase
  7.400 Scope of subpart.
  7.401 Acquisition considerations.
  7.402 Acquisition methods.
  7.403 General Services Administration assistance.
  7.404 Contract clause.

Subpart 7.5—Inherently Governmental Functions
  7.500 Scope of subpart.
  7.502 Applicability.
  7.503 Policy.

Excerpts:

  7.101 (a) Agencies shall perform acquisition planning and conduct market research (see Part 10) for all acquisitions in order to promote and provide for—
    (1) Acquisition of commercial items or, to the extent that commercial items suitable to meet the agency’s needs are not available, nondevelopmental items, to the maximum extent practicable ; and
    (2) Full and open competition or, when full and open competition is not required, to obtain competition to the maximum extent practicable, with due regard to the nature of the supplies or services to be acquired.

  7.103 The agency head or a designee shall prescribe procedures for—
  (b) Encouraging offerors to supply commercial items, or to the extent that commercial items suitable to meet the agency needs are not available, nondevelopmental items in response to agency solicitations; and
  (c) Ensuring that acquisition planners address the requirement to specify needs, develop specifications, and to solicit offers in such a manner to promote and provide for full and open competition with due regard to the nature of the supplies and services to be acquired.
  (d) Establishing criteria and thresholds at which increasingly greater detail and formality in the planning process is required as the acquisition becomes more complex and costly.
  (f) Ensuring that the principles of this subpart are used, as appropriate, for those acquisitions that do not require a written plan as well as for those that do.
  (l) Assuring that the contracting officer, prior to contracting, reviews:
    (1) The acquisition history of the supplies and services; and
    (2) A description of the supplies, including, when necessary for adequate description, a picture, drawing, diagram, or other graphic representation.
  (r) Ensuring that knowledge gained from prior acquisitions is used to further refine requirements and acquisition strategies. For services, greater use of performance-based acquisition methods should occur for follow-on acquisitions.
  (s) Ensuring that acquisition planners, to the maximum extent practicable—
    (1) Structure contract requirements to facilitate competition by and among small business concerns; and
    (2) Avoid unnecessary and unjustified bundling that precludes small business participation as contractors.

  7.104 (a) Acquisition planning should begin as soon as the agency need is identified, preferably well in advance of the fiscal year in which contract award or order placement is necessary. In developing the plan, the planner shall form a team consisting of all those who will be responsible for significant aspects of the acquisition, such as contracting, fiscal, legal, and technical personnel. If contract performance is to be in a designated operational area or supporting a diplomatic or consular mission, the planner shall also consider inclusion of the combatant commander or chief of mission, as appropriate. The planner should review previous plans for similar acquisitions and discuss them with the key personnel involved in those acquisitions. At key dates specified in the plan or whenever significant changes occur, and no less often than annually, the planner shall review the plan and, if appropriate, revise it.
   (b) Requirements and logistics personnel should avoid issuing requirements on an urgent basis or with unrealistic delivery or performance schedules, since it generally restricts competition and increases prices. Early in the planning process, the planner should consult with requirements and logistics personnel who determine type, quality, quantity, and delivery requirements.

Procurement controversies -- Selangor State, Malaysia

Loopholes in government contracting mechanism — Sin Chew Daily

The chief contractor responsible for cleaning of government hospitals in Selangor, Radicare (M) Sdn Bhd, has apparently breached the contract regulations. The shortage of cleaners in Klang, Kajang, Selayang and Banting Hospitals has resulted in poor hospital hygiene conditions. Two operating theaters in Kajang Hospital have to be temporarily closed while non-urgent surgeries have to be postponed due to difficulty in maintaining the hygiene at these operating theatres. It is shocking to find that several hospitals are facing the same problem at the same time.

The Health Ministry must take stern action against Radicare to warn other contractors. In addition, since Radicare was appointed and contracted by the Health Ministry, the ministry should also be blamed for the incapability of Radicare to perform the contract, affecting the normal operation of hospitals. Also, the Selangor state government should also make a review for its lax oversight, as maintaining healthcare quality and ensuring the safety and hygiene of patients and the public is a shared responsible of the Health Ministry and state government.

The problem originated from the drawbacks in the government’s contract bidding mechanism. For instance, contractors are appointed without going through the process of bidding; contract conditions do not adequately protect the interests of the government; and the government’s inability to assess and compare the qualities of contractors. Contractors’ poor quality and lack of integrity would not only drag the administrative progress of government agencies, but also harm the people’s interests.

On the other hand, after signing a contract with the government, the appointed contractor is allowed to hire its own sub-contractors to handle the project or job. Such a practice makes it easy to have poor supervision and loopholes. The Health Ministry has appointed three companies to take care of the non-clinical support services of healthcare establishments in the country tasked with the responsibility of maintaining the cleanliness of state government hospitals. Radicare, one of the contractors, has actually hired incapable sub-contractor for the job and thus, led to the cleaner shortage problem.

Taking it as a lesson, the government will need to draw a transparent and more professional contract bidding mechanism to ensure that all contractors are good in quality, as well as integrity. The public’s demand for transparency in government operations, including the request of open tender for government contracts, has increased, and some "Ali Baba" contractors who gained government contracts through relations instead of open tender will only undermine the government’s credibility.