Florida no-bid health contract unhealthy for competition

Watchdogs denounce no-bid prison contract

The company hired to provide health care to most of the state’s prison inmates stands to make millions of dollars in administrative fees and profits under a no-bid contract that ultimately could be worth more than a billion dollars.

The Florida Department of Corrections last month contracted with Centurion of Florida to provide prison health care in the north and central regions of the state, following a decision last November by Corizon Healthcare, the previous provider in those areas, to bow out early from its contract. And while the department negotiated with several different vendors to fill the gap left by Corizon’s departure, it did not go through a formal competitive process before contracting with Centurion.

Centurion, though its parent company Centene, has a team of lobbyists that includes former House speakers Dean Cannon and Larry Cretul. Since 2014, Centene has given nearly $315,000 to Florida lawmakers and political committees. “It’s just a concern when you have a contract that big not competitively bid and then you see the amount of campaign contributions that the parent company has been making,” said Ben Wilcox, research director for Integrity Florida. “Did the campaign contributions buy influence? Did the 17 registered lobbyists help them win this contract?”

DOC officials said the agency didn’t have time to go through a competitive process and that it didn’t have to, under a statutory exemption involving the procurement of health care services.

Under its contract with DOC, Centurion will be reimbursed for its actual costs, including salaries and benefits of doctors, nurses and other staff, off-site care and insurance premiums. — to cover human resources, payroll, information technology and, the contract specifically states, profit.

Dominic Calabro, president and CEO of the fiscal watchdog Florida TaxWatch, said the public can’t be assured it got the best deal on prison health care without a competitive process.

“The best way to make sure you get value is through a procurement that is competitive, accountable and transparent,” he said. “And you want to have a system that rewards healthy outcomes and controls costs. The incentive of paying them $268 million (including) 13 percent of their costs encourages them to have higher, not lower, costs.”

There is a great deal more to this, as reported in the story at the link above, which you ought to read in the original at the link above.

Failure to provide effective competition is a glaring hole in the integrity of the procurement process here. But there is another issue mentioned, as quoted above:

"Centurion will be reimbursed for its actual costs.... On top of that, the company will get an additional payment — 13.5 percent of its actual costs...."

Alarm bells would normally ring off the walls with such a deal. Cost plus a percentage of cost contracts are generally considered to be illegal, plain and simple.

The ABA Model Procurement Code § 3-501 says

Subject to the limitations of this Section, any type of contract which will promote the best interests of the [State] may be used; provided that the use of a cost-plus-apercentage-of-cost contract is prohibited.

Guam's procurement law, based on the Model Code, follows suit.

At the national level, the Federal Acquisition Regulations, § 16.102(c), says:

The cost-plus-a-percentage-of-cost system of contracting shall not be used (see 10 U.S.C. 2306(a) and 41 U.S.C. 3905(a)). Prime contracts (including letter contracts) other than firm-fixed-price contracts shall, by an appropriate clause, prohibit cost-plus-a-percentage-of-cost subcontracts (see clauses prescribed in Subpart 44.2 for cost-reimbursement contracts and Subparts 16.2 and 16.4 for fixed-price contracts).

The tenacity - and audacity - of incumbent legacy

Although not part of the ABA Model Procurement Code which is Guam's model for its own Procurement Act, 5 GCA 5210, which summarizes the various authorized procurement methods, says "(a) Unless other wise authorized by law, all territorial contracts shall be awarded by competitive sealed bidding [except as authorized by other specified procurement methods. (b) Nothing in this Section requiring competitive bidding shall prohibit the development of specifications which require compatibility with existing supplies, equipment or data processing systems."

On the face of it, such compatibility seems rational enough. The Guam drafters of this provision thought so, commenting "In the past, some problems have arisen due to the requirement for competitive bidding for equipment which should have been, but was not, compatible with existing equipment. The reason alleged was that the lowest bidder had to be chosen. Of course, the proper writing of specifications could have prevented the problem and Subsection (b) makes clear that compatibility may be a legitimate part of the specifications."

Fortunately, the provisions on specifications, in Article 4 of the procurement law, is not part of "this Section", so are not, on the face of the provision, restricted by it, and the provisions of Article 4 are replete with requirements for competition, saying nothing of compatibility. This become important when one stops to consider that compatibility is a substitute for legacy, old school technology and creative destruction.

Which brings me back to yet another Motorola case, this one decided by the federal GAO, related to Motorola's lock on the radio communications market. As always, read the cases and articles in the original, and don't rely on my creative destruction of them in my rendering.

Matter of: Harris IT Services Corporation B-411699; B-411796, October 2, 2015

Harris IT Services Corporation protests the terms of two requests for proposal issued by the Department of Justice, Federal Bureau of Investigation (FBI), to acquire land mobile radio (LMR) equipment through the issuance of a single delivery order under each RFP. Harris maintains that both of these RFPs improperly contemplate the issuance of a single, second-tier, indefinite-delivery, indefinite-quantity (IDIQ) instrument (labelled by the FBI as a delivery order), under which the agency will place subsequent delivery orders for this equipment without providing Harris a fair opportunity to compete for those orders, in violation of the statute authorizing the use of multiple-award IDIQ contracts. Harris also argues that the RFPs contemplate the issuance of orders that potentially exceed the scope of the underlying multiple-award IDIQ contract program, and include unduly restrictive specifications.

We sustain the protests.

Both solicitations have been issued under the Department of Homeland Security’s (DHS) tactical communications (TacCom) IDIQ multiple award contracts program and competition has been limited to concerns that previously have been awarded contracts under the DHS TacCom program. The underlying DHS TacCom multiple award IDIQ contract program solicitation contemplated the award of IDIQ contracts for a full array of communications equipment and services ("commodity products, infrastructure and services"). "DHS seeks to establish a multi-vendor approach to implementing fully interoperable solutions to support mission critical, public safety communications." In effect, the equipment to be purchased using the TacCom program is required to employ open systems architecture so that each contractor’s equipment will “interoperate” with equipment manufactured by other concerns.

The current RFPs represent the FBI’s second attempt to meet its requirements for the equipment being solicited. The first attempt sought the award of a sole-source contract for these requirements, and supported its solicitation with a justification and approval ("J&A"; aka "determination")) document maintaining that only one source--Motorola--was capable of meeting its requirements. After protests, this approach was abandoned.

This is the second attempt. RFP 68 is for the acquisition of “subscriber base radio” LMR equipment and is valued at approximately $200 million. RFP 81 is for the acquisition of infrastructure LMR equipment and is valued at approximately $135 million. Both RFPs contemplate the issuance of what the FBI characterizes as a single delivery order for a base year, with 4 one-year options.

The Federal Acquisition and Streamlining Act of 1994 (FASA) provided agencies with express authority to award task and delivery order type contracts. Broadly speaking, the statutory and regulatory framework favors the award of multiple task or delivery order contracts for the same requirements, rather than the award of a single task or delivery order contract for an agency’s requirements.

The drafters of this federal law said the use of task order contracts for advisory and assistance services and establishing a requirement that solicitations for such contracts shall ordinarily provide for multiple awards and for fair consideration of each awardee for task orders issued under the contracts; indiscriminate use of task order contracts for broad categories of ill-defined services unnecessarily diminishes competition and results in the waste of taxpayer dollars; in many cases, this problem can effectively be addressed, without significantly burdening the procurement system, by awarding multiple task order contracts for the same or similar services and providing reasonable consideration to all such contractors in the award of such task orders under such contracts; and, all federal agencies should move to the use of multiple task order contracts, in lieu of single task order contracts, wherever it is practical to do so.

[Similarly, see Guam procurement regulations: 2 GAR 3122(b): A multiple award is an award of an indefinite quantity contract for one or more similar supplies or services to more than one bidder or offeror when the territory is obligated to order all of its actual requirements for the specified supplies or services from those contractors. A multiple award may be made when award to two or more bidders or offerors for similar products is necessary for adequate delivery, service, or product compatibility.]

The statutory and regulatory framework contemplates that, where an agency is issuing task or delivery orders using a multiple-award IDIQ contract program, it is not required to engage in full and open competition, and may instead confine its competition to firms that have been awarded an underlying multiple-award IDIQ contract. However, those same provisions require agencies to give each contractor that has been awarded a contract a “fair opportunity” to be considered for each task or delivery order in excess of $3,500, and to provide for “enhanced competition” for orders in excess of $5.5 million. Finally, each task or delivery order must specify all of the services to be performed or all the property to be delivered under the order.

Harris first argues that the RFPs impermissibly call for the issuance of what amounts to IDIQ instruments to the successful contractor for a 5-year period. The protester maintains that the RFPs effectively remove the agency’s requirements from further competition for an extended period and amount to an impermissible “downselect” to a single vendor. Harris maintains that this is inconsistent with the terms of the underlying TacCom contracts, as well as applicable statutes and regulations which, the protester maintains, require the FBI to permit all of the eligible TacCom vendors to compete for every delivery order that the FBI may issue to meet its requirements.

The FBI explains that it elected to take this approach to meet its ongoing and future, geographically diverse, requirements in the most streamlined manner possible. According to the agency, its approach will allow it to avoid individually having to compete potentially dozens of delivery orders for varying quantities of equipment over a 5-year period. According to the agency, the latter approach--competing potentially dozens of separate delivery orders--“would place an enormous administrative burden on the FBI.” Legal Memorandum at 5. The agency states that its approach will result in substantial savings of both time and money over the contemplated 5-year period of the delivery orders.

As set forth below [sorry: you're going to have to read the case decision], we conclude that the FBI’s solicitations contemplate the award of what, in effect, would amount to single, multi-year, second-tier IDIQ instruments that are not permitted under the requirements discussed above. The FBI’s contemplated award of a 5-year second-tier IDIQ instrument to a single contractor is inconsistent with the requirements of the applicable statutes and FAR provisions regarding what constitutes a “delivery order.” Those requirements are, at a minimum, that the delivery order be defined as to quantity, place of delivery and schedule.

[Compare Guam's definition of an "incremental" contract, which is distinct from the "multiple award" contract mentioned earlier, in 2 GAR 3122(a). An incremental award is an award of portions of a definite quantity requirement to more than one contractor. Each portion is for a definite quantity and the sum of the portions is the total definite quantity required. An incremental award may be used only when awards to more than one bidder or offeror for different amounts of the same item are necessary to obtain the total quantity or the required delivery. The right to make such an award and the criteria for award shall be stated in the solicitation. Thus, multiple awards, for indefinite quantities, and incremental awards, for definite quantities, are limited to cases where awards to more than one contractor are necessary to obtain the total quantity of the required delivery.]

In essence, the two orders contemplated under these RFPs will deprive all the other TacCom contractors of a fair opportunity to compete for each of the delivery orders that will be issued in the future, despite their aggregate value of approximately $335 million. We therefore sustain this aspect of Harris’s protest.

Harris also maintains that the RFPs impermissibly include a period of performance that exceeds the period of performance of the underlying TacCom contracts. In this connection the FBI’s RFPs contemplate the issuance of delivery orders until August 31, 2020 (whereas the TacCom contracts only allow for issuance of delivery orders until March 25, 2019), and contemplate fulfilling those delivery orders by August 31, 2021 (whereas the TacCom contracts contemplate fulfilling all delivery orders by May 25, 2021). The FBI notes in connection with this allegation that both RFPs incorporate the terms of the underlying TacCom IDIQ contracts and provide that, in the event of a conflict, the terms of the underlying TacCom contracts control. According to the agency, to the extent its RFPs specify a period of performance longer than that contemplated under the TacCom contracts, the terms of the TacCom contracts supersede the terms of its RFPs.

We agree with Harris that the RFPs seek impermissibly to increase the scope of the underlying TacCom contracts. As noted, the agency does not deny that its contemplated delivery schedules vary from, and increase the period of performance beyond, the terms of the underlying TacCom contracts. Rather, the FBI merely asserts that the terms of the TacCom contracts will supersede the inconsistent terms of its solicitations. However, the fact remains that the RFPs expressly contemplate a period of performance longer than the period of performance included in the TacCom contracts.

In addition, and more fundamentally (as discussed above), neither RFP includes a maximum quantity, but, rather, specifies only an estimated quantity. As we conclude above, there essentially is no limit on the quantities the agency could order under the second-tier IDIQ instruments contemplated by the RFPs. It follows that the agency could order quantities that exceed not only the estimated quantities specified in the RFPs, but also the maximum value of the underlying TacCom contracts. In view of the foregoing, we conclude that the FBIs RFPs contemplate delivery orders that potentially are beyond the scope of the underlying TacCom contracts. We therefore sustain this aspect of Harris’s protest.

As a final matter, Harris’s protests that certain specifications are unduly restrictive and are designed to result in the award of the delivery orders to Motorola. Because we recommend below that the agency cancel the RFPs and consider alternatives to how it intends to meet its requirements, we need not consider these allegations in great detail. Nonetheless, we discuss several obvious solicitation requirements that even the agency concedes call for Motorola-specific products.

RFP 68 requires that all radios provided be compatible with a standards based radio system called “SmartNet.” In a similar vein, RFP 68 calls for providing radios that can be reprogrammed using “over-the-air-rekeying” when used with a “key variable loader.”

Harris maintains that these requirements are proprietary to Motorola and that, for all intents and purposes, they limit competition under RFP 68 to products made by Motorola. Harris also maintains that specifying such requirements is inconsistent with the overarching requirement of the TacCom contracts to provide equipment that is interoperable and that meets the P25 open architecture standards.

The agency does not challenge Harris’s fundamental assertion, but nonetheless maintains that these requirements are necessary in order for the radios that it acquires to meet the agency’s needs for data security, and in order for them to be useable with state and local law enforcement entities that still use legacy radio systems that depend on the Motorola-proprietary standards specified.

Where an agency seeks to issue a task or delivery order to acquire items peculiar to one manufacturer, it must execute a J&A in support of its specification for the task or delivery order, unless it has otherwise executed a J&A for other than full and open competition. Here, the agency concedes that it has specified Motorola-specific requirements. However, the record does not include the required J&A, and the agency has offered no explanation regarding its failure to execute such a J&A.

The agency previously attempted to meet its requirements on a sole-source basis, but concluded that the J&A prepared in connection with that acquisition was inadequate to support its attempted sole-source acquisition of Motorola products. Here, the agency again is attempting to acquire Motorola-specific products, but has not executed the required J&A, or even, for that matter, explained or demonstrated why it is not required to execute the J&A. Under the circumstances, we conclude that the RFPs include specifications for products that are specific to Motorola, and that the agency has failed to justify its inclusion of such requirements. We agree with Harris that the agency’s attempt to acquire Motorola-specific equipment appears fundamentally inconsistent with the underlying interoperability objective of the TacCom IDIQ contract program.

We recommend that the FBI cancel the solicitations.

Switcheroo

This post covers a couple of instances in which an award is protested after it has been made. It concerns changes made to the contract awarded. But, because the basis of the protest is the disparity between what was bid and the contract made, it was determined that this was not a contract dispute but a valid protest of the award. In some other words, the contracting formation process begun by the solicitation was so tainted that the protest related back to solicitation, not to the contract itself.

The first instance is in a recent GAO decision. It was reported about in this article: GAO dinged the Army for swapping out requirements post award. The GAO decision itself is reported here. The following is taken from the GAO decision, but selectively and somewhat rearranged, so you need to read the whole decision to keep me honest in my characterization of it. I've also eliminated footnotes and citations, so a student or practitioner would definitely want to read the original.

Matter of: System Studies & Simulation, Inc., B-409375.2; B-409375.3, May 12, 2014

DIGEST: Protest that agency improperly made award of a contract for its actual requirements that differed significantly from the requirements solicited is sustained, where record shows that agency’s actual requirements are for less than 30 percent of the requirements solicited; agencies are required to accurately specify their requirements in a manner that affords offerors an opportunity to compete for the agency’s actual requirements.

The RFP contemplates the award of a fixed-unit-price, indefinite-delivery, indefinite-quantity requirements type contract to provide instructor pilots to perform flight training on a variety of helicopter airframe models. Award was to be made to the firm submitting the low-priced, technically acceptable proposal for a base year1 and up to three 1-year options. The agency could eliminate any proposal for offering unreasonably high/unrealistically low, unbalanced, inaccurate or incomplete prices.

The RFP included a pricing matrix that offerors were required to complete. In that matrix, offerors were required to calculate the fully burdened hourly rates for various labor categories (the labor categories were: program manager, alternate program manager, UH-60 instructor pilot, AH-60D instructor pilot, OH-58D instructor pilot, AH-64D maintenance examiner, UH-60M maintenance examiner, and UH-60A/L maintenance examiner). Offerors also were required to calculate extended prices for the contract based on quantity estimates included elsewhere in the RFP.

After receiving and evaluating the offerors’ revised proposals, the agency made award to M1, finding that it had submitted the low-priced, technically-acceptable proposal.

By letter dated December 5, the agency advised S3 of its award decision.

Systems Studies & Simulation, Inc., (S3), subsequently filed a protest in our Office alleging, among other things, that M1 had engaged in an improper bait and switch relating to its proposed key personnel (its program manager and alternate program manager), and that the agency had failed to evaluate M1’s price for realism. In response to that protest, the Army advised our Office that it would take corrective action and we dismissed the protest as academic on January 15, 2014.

The record shows that the agency investigated S3’s bait and switch allegation and also evaluated the proposals of S3 and M1 for price realism. After these activities, the agency affirmed its selection of M1 on January 27, 2014.

[Here another factor is interjected: S3 already held an existing contract similar to this one being solicited.] Also on January 27, the record shows that the agency’s cognizant commanding officer sent a memorandum to the agency’s administrative contracting officer directing him to partially terminate a significant portion of the agency’s then-current contract for pilot instruction services. These services--being provided under a predecessor contract being performed by S3--were reduced due to a change in the agency’s needs.

On January 28, S3 became aware of the agency’s changed requirements because, as noted, it was the incumbent contractor for the requirement, and was sent a letter dated January 28 partially terminating its contract. The record also shows that S3 inquired as to whether the change to the agency’s requirements was confined to its predecessor contract, or represented the agency’s needs going forward. S3 was advised that the revised requirements would remain in effect for the foreseeable future because of the availability of in-house Department of Defense personnel to perform the training in lieu of contractor personnel.

Finally, the record shows that, on January 31, the agency’s administrative contracting officer sent an e-mail to the agency’s procurement contracting officer (the individual actually conducting the current acquisition, and also serving as the source selection official here) advising her of the significant reduction in the agency’s requirements.

Here, the agency has determined that its actual requirements are significantly different from the requirements that it solicited, and for which the offerors competed. This change represents a reduction in the agency’s overall anticipated requirements of more than 70 percent. It also reflects a significant change in the types of instructors and maintenance examiners required. The record therefore shows that the agency’s current requirements bear little relationship to the requirements that it solicited, and for which the offerors competed.

S3 argues that the Army altered its requirements after making award of the contract to M1. S3 asserts that the change to the agency’s requirements is substantial, and that it would have altered its proposed staffing had it known about the agency’s revised requirements. S3 therefore contends that it was prejudiced by the agency’s failure to solicit its revised, actual, requirements once it became aware of those requirements.

The agency responds that the source selection authority/contracting officer (SSA) was unaware of the change to the agency’s requirements at the time she made her source selection and did not learn of the change until several days later. The agency therefore takes the position that it did not make award with a view to substantially altering the contract after award.

In the alternative, the agency argues that, because this is a requirements contract, there was no obligation on the part of the government to order the estimated quantities included in the RFP. The agency therefore reasons that any reduction in its actual requirement--as compared to the RFP’s estimates--was contemplated by the type of contract solicited.

As a general rule, agencies may not properly award a contract on a basis that is fundamentally different from the basis upon which the competition for the requirement was conducted. Where, for example, there is a significant change in the government’s quantity requirements, the appropriate course of action is for the agency to apprise the offerors of its revised requirements, and afford them an opportunity to submit proposals responsive to those revised requirements, even where, as here, a source selection decision has been made.

In addition, the fact that a requirements-type contract is being used does not relieve the agency of its fundamental obligation to conduct a competition on the basis of the most accurate or realistic estimates of the total quantity of goods or services likely to be ordered. This is because, without such realistic estimated quantities, firms cannot prepare offers that reflect the agency’s actual, anticipated needs.

In responding to the protest, the Army essentially relies on the temporal lack of knowledge on the part of its SSA concerning the agency’s revised requirements. The agency therefore maintains that the original award was proper, and that the change to its requirements is a matter of contract administration.

However, the agency’s reliance is misplaced, since the record shows that the organization as a whole--and more particularly, the agency’s cognizant commanding officer--had to have been aware of the Army’s changed requirements prior to the agency’s revised source selection decision. Nonetheless, the record compels the conclusion that the commanding officer was aware of the change to the agency’s requirements. As noted, the record includes his instruction to partially terminate the protester’s predecessor contract, which was executed on January 27, the same date on which the revised source selection decision was made. In any event, where an agency’s requirements change due to the passage of time occasioned by protest litigation, the agency is nonetheless still required to afford offerors an opportunity to submit proposals responsive to the agency’s revised requirements.

The agency also asserts, based on calculations it has performed, that S3 was not prejudiced by the agency’s failure to solicit its revised requirements because its price still would not have been low. The agency’s calculations are based on hourly rates proposed by the offerors in response to the earlier requirement. The protester maintains, however, that it would have changed its proposed staffing profile, as well as proposed personnel had it known of the agency’s actual requirements.

The agency’s calculations provide no basis for our Office to conclude that the protester was not prejudiced. As correctly noted by the protester, those calculations are based on personnel that the offerors may, or may not, have proposed had the agency advised them of its actual requirements (protest sustained where record showed reasonable possibility of prejudice to protester).

We recommend that the agency either amend its current solicitation to reflect its actual requirements, or cancel the current RFP and issue a new solicitation that reflects its actual requirements. Should M1 not be identified as the successful offeror, we further recommend that its contract be terminated for the convenience of the government, and that the agency make award to the firm identified as the successful concern, if otherwise proper.

This decision was characterized in a post by Nicholas T. Solosky of law firm Fox Rothschild LLP on the Mondaq website as follows:

GAO recently sustained a protest filed concerning the difference between the government's actual needs and what was solicited from contractors as part of the RFP. The protestor challenged the award of a fixed-unit-price, indefinite-delivery, indefinite-quantity requirements contract to provide instructor pilots to perform helicopter flight training. 

After the contract was awarded, however, the government made unilateral changes to its scope – reducing the agency's overall anticipated requirements by more than 70 percent. Based on these significant alterations, the GAO noted that: "The record therefore shows that the agency's current requirements bear little relationship to the requirements that it solicited, and for which the offerors competed."

After considering the reduced scope of services, GAO sustained the protest and recommended "that the agency either amend its current solicitation to reflect its actual requirements, or cancel the current RFP and issue a new solicitation that reflects its actual requirements." The basis for GAO's decision is the long-standing rule (well-established in GAO case law) that agencies may not properly award a contract on a basis that is fundamentally different from the basis upon which the competition for the requirement was conducted.

It may be helpful to remind here that a "requirements" contract is a particular variant of an indefinite quantity contract. A requirements contract obligates the government to acquire its actual needs. It is not a discretionary decision of the government. See 2 GAR 3119(i) of the Guam Procurement Regulations, based on the ABA Model Procurement Code and regulations for a description of and the requirements for an indefinite quantity contract (subsection ii), how it differs from a definite quantity contract (subsection i), and the description and requirements for a requirements contract (subsection iii).

The other case, promised above, is a Guam Public Auditor's appeals decision on a bid protest, OPA-PA-11-002. I will not discuss the details of this case (I represented the protestor and the case is still on appeal to the courts by the awardee) other than to point out that it involved a solicitation for a variety of pieces of copier equipment, ranging from lower to higher cost items. 

After the low bidder was determined and announced to be the intended awardee of the contract, the contract actually made increased the numbers of high cost items and reduced the numbers of lower cost items, with the result that the contract price increased roughly 25% over the bid amount. 

The Public Auditor found that the quantity changes were in violation of law and, by virtue of the remedies allowed by Guam law, terminated the contract. (As the matter continues through the court by virtue of the judicial appeal, the decision of the Public Auditor terminating the contract is stayed and the "terminated" contract looks at this point to become fully or at least mostly performed before a final decision is rendered.)

This highlights one distinction between federal GAO protest cases and local ones: a federal protest stays not just the solicitation but also contract performance; not so locally.

Cost plus a percentage of cost contracts

Generally speaking, the government can enter into any kind of contract it wants, with the proviso here that I refer to the types of price incentives the government desires to incorporate into a contract. And I add that there may be conditions placed on many types of such incentives. But the one type of price incentive contract that seems to extract uniform rejection in US procurement law is a cost-plus-percentage-of-cost contact.

I was reminded of this when I read a story about a contract the Government of Guam is proposing, considering or playing hot-potato with. (Actually, it remains a political mystery whether the government is proposing it or not; let's just say it is on some kind of agenda of someone somewhere and involves the highest levels of the Guam executive and legislative concerns as well as those of the Guam Federal District Court, but that's another story.)

Here's the story with the critical part pertinent to this post:

‘GRRP plan too expensive’

The 214-page draft agreement negotiated between GRRP and the Guam Economic Development Authority would contract GRRP to build a waste-to-energy plant and manage the island’s solid waste, if implemented. Though it is dated Dec. 13, 2013, it only came to light last week.

“Waste-to-energy, when done properly, is another way to make the landfill last longer. However, waste-to-energy will not be inexpensive if GovGuam goes down this road. To suggest it will actually reduce the cost of the system and the rates of solid waste customers is either badly mistaken or intentionally misleading,” said David Manning, the federal receiver's representative.

Under the agreement, GRRP would receive at least $125 million in bond money from bonds authorized by GovGuam to build a waste-to-energy plant. Under a cost-plus provision of the agreement, GRRP would be entitled to a 15 percent fee on the cost of the construction. This amounts to $18.75 million on construction costs of $125 million.

The pertinent part, obviously, is the suggestion that this contract proposes "a cost-plus provision", where the "plus" is "a 15 percent fee on the cost of construction."

The federal government regulations discuss contract types and their selection in FAR Part 16. Cost reimbursement contracts are covered in Part 16.3. Incentive contracts are covered generally in FAR Part 16.4. "The cost-plus-a-percentage-of-cost system of contracting shall not be used" (FAR Part 16.102(c)).

Guam law, based in the ABA Model Procurement Code, is much less descriptive or as complicated as the FAR. It simply says,

"Subject to the limitations of this Section, any type of contract which will promote the best interest of the Territory may be used; provided that the use of cost-plus-a-percentage-of-cost contract is prohibited. A cost-reimbursement contract may be used only when a determination is made in writing that such contract is likely to be less costly to the Territory than any other type or that it is impracticable to obtain the supplies, services or construction required except under such contract." (5 GCA Section 5235.)

The genesis of the aversion to cost plus a percentage of cost pricing appears to have taken form in the days before Pearl Harbor when the US was anticipating war, but was informed by circumstances from the First World War, as mentioned in a US Supreme Court case, MUSCHANY ET AL. v. UNITED STATES 324 US 49, 1945, an interesting case.

The case involved the condemnation of land by the US by eminent domain, and the contract with an agent to obtain options in contemplation of condemnation. The agent's fee was a 5% commission to be withheld from the proceeds due the landowners. As the opinion described,

"There were a large number of landowners in the required area. Options were obtained from 270, including the petitioners, and with one exception the options were accepted by the Government at the optioned price. Almost half of the contracts were closed by acceptance of deeds and payment of the price. Criticism of the prices and manner of purchase developed and the War Department repudiated the remaining contracts and turned to condemnation. The repudiation followed upon the conclusion among other things that the contracts violated the statutory provision against the cost-plus-a-percentage-of-cost system of contracting, and were contrary to public policy because of the contingent interest of McDowell, which was antagonistic to the Government."

The Court then discussed the law:

"Prior to the present war emergency the Secretary of War had broad powers to acquire land for military purposes by purchase at prices deemed reasonable by him or by condemnation. There were no restrictions as to the manner in which he should exercise this power to purchase, but his power to contract for construction work was sharply limited by statute. These restrictions, if continued, would have seriously impeded the War Department's preparation for war. Thereupon Congress passed the act of July 2, 1940, which removed certain of these prior statutory restrictions. The act did, however, restrict the broad powers conferred therein by prohibiting the use of cost-plus-a-percentage-of-cost contracts; use of cost-plus-a-fixed-fee contracts was expressly approved by the act. The question is raised as to whether the prohibition of cost-plus-a-percentage-of-cost contracts applies to the War Department's purchase of these lands with appropriations for the fiscal year 1941.

We are of the opinion that the first section of the act of July 2, 1940 indicates that the purchase of land by the War Department is subject to the provisions of that section; therefore, the proviso in the section which prohibits use of the cost-plus-a-percentage-of-cost system of contracting must be taken to apply to purchases of land.

Our next inquiry is as to whether the contract with the vendors violates this prohibition against cost-plus-a-percentage-of-cost contracts. Evidently the proviso was inserted to avoid the abuses which were prevalent before and during the first World War from the Government's guarantee of cost plus a profit to contractors.

The purpose of Congress was to protect the Government against the sort of exploitation so easily accomplished under cost-plus-a-percentage-of-cost contracts under which the Government contracts and is bound to pay costs, undetermined at the time the contract is made and to be incurred in the future, plus a commission based on a percentage of these future costs. The evil of such contracts is that the profit of the other party to the contract increases in proportion to that other party's costs expended in the performance. The danger guarded against by the Congressional prohibition was the incentive to a government contractor who already had a binding contract with the Government for payment of undetermined future costs to pay liberally for reimbursable items because higher costs meant a higher fee to him, his profit being determined by a percentage of cost."

Rolling out the (pork?) barrel

As a long time PC user, I forever wonder when the Windows operating system will finally be rolled out. Not to entirely blame the software writers, of course, because the platforms and end-uses are constantly changing but built on that first DOS code. The world of IT is not even planned obsolescence: it is intrinsic obsolescence. 

Yet, our expectations as users are based in now out-dated notions that we can make one production run of a uniform product from assembly line to market to consumer, like flooding the market with Hula-Hoops in time for the 1961 Christmas season sales.  

IT is just not that simple. Beta is now often marketed, but not market ready. As we find out with the roll out of the Affordable Care Act online market scheme.

The problem with IT in general, with my PC as much as with large institutions and new age weaponry, is that we rely on it too much. Given the cost and the proprietary nature of most of the software and hardware, IT "solutions" become mission critical to whatever the mission is.  IT "solutions", as we mostly know them now, hold a monopoly tollbooth on processes that just a generation or two ago were more decentralized, across many desks.

The whole internet, on which most IT solutions are reliant, is designed to spread out the flow, storage and delivery of information, across all platforms and all delivery systems.  But, once that information hits one of those IT monopoly tollbooths, it stops.  

As we look to the limitations of rolling out mass IT solutions, we might consider if our acquisition plans should be modified, to allow more open sourcing cross-platform arrangements that can be farmed out to more competitors, so that if there is a failure at any given point in the web of information delivery, the whole web process does not fail, and we do not pay a monopolist's price at the information tollbooth.

The risk of the mission, and the cost of the monopoly, seem to be unquestioned givens in IT solution acquisitions. Why?

Those are just random thoughts as I read about the political tut-tutting and point scoring surrounding the ACA "Obamacare" online roll-out, such as the following linked articles (please read the article at the link; I have only included bits without context).

Good enough for government work**? The contractors building Obamacare

as head-scratching continues about how a famously web-savvy administration could have flubbed its Internet homework so badly, an examination by the Sunlight Foundation shows the administration turned the task of building its futuristic new health care technology planning and programming over to legacy contractors with deep political pockets. Health and Human Services Department will not release a list of the estimated dozen or more companies tasked with building the site. But Sunlight reviewed contract award information from USASpending.gov and FedBizOpps.gov, and found 47 organizations that won contracts from Health and Human Services or the Treasury Department to manage, support or service the implementation of the Affordable Care Act. Among them were top contractors like Northrop Grumman, Deloitte LLP, SAIC Inc. General Dynamics and Booz Allen Hamilton. All five of those companies provided information technology services to either the Centers for Medicare and Medicaid Services or the Internal Revenue Service, the two agencies tasked with building back components of the health insurance exchanges.

Because the government provides brief, partial descriptions of contracts in USASpending.gov, it is not possible to say which of the contractors with information technology contracts or project management contacts were involved in building the 36 federally run health insurance marketplaces, a responsibility tasked to the Centers for Medicare and Medicaid Services, known by the acronym CMS, or those assigned to develop the federal data hub, which would allow applicants to have their income and family size immediately verified by the Internal Revenue Service. Sunlight's survey does not include awards to contractors that built the 14 state exchanges. For example, Xerox Corp. won a $72 million contract to help build Nevada’s exchange and one for $68 million to do the same in Florida. Not only is Xerox building the online marketplaces for some states, it's also offering insurers the means to “fully take advantage of the nearly 30 million new members that will be shopping for health care on these exchanges.”

Obamacare glitches: Gov't contract for troubled site has swelled; GOP targets Sebelius

The government contract for the company that built the glitch-prone website for Obamacare has ballooned to three times its original cost, and some Republicans are demanding the resignation of the cabinet secretary who oversees it. USA Today, citing technology experts, reported that the site was built using 10-year-old technology and may require constant fixes for the next six months and eventually an overhaul of the whole system. But Gail Wilensky, a former director of Medicare and Medicaid who is now a health care analyst, said that CGI was forced to deal with last-minute design changes ordered by the government, hampering CGI’s ability to test the site. Last June, a GAO report foreshadowed those problems, warning that the website might not be ready to go live, in part because of all the last-minute design changes.

Red Flags? Company behind ObamaCare site has checkered past

While the company behind the dysfunctional HealthCare.gov was virtually unknown to the American public until this month, critics say the Obama administration should have known this multibillion-dollar firm had a checkered history with other government contracts. In projects stretching from Canada to Hawaii, parent company CGI Group and its subsidiaries ran into complaints about its performance.

Meet CGI Federal, the company behind the botched launch of HealthCare.gov

Over the past few weeks, if you've been paying attention at all to the unfolding disaster of people trying and failing to sign up for Obamacare online, one name keeps coming up: CGI Federal, the IT contractor that has orchestrated most of the Healthcare.gov Web site. By most accounts, it's been a complete train wreck, for reasons both technical and bureaucratic. Here's what you need to know about the company at the center of it all.

CGI Federal is a wholly owned subsidiary of the Canadian firm CGI Group. Growing through scores of acquisitions, and providing outsourced IT services to massive companies such as Bell Canada and Quebec's provincial pension plan, CGI's business model depends on embedding itself deeply within an institution. CGI Federal is a relative newbie on the U.S. government IT contracting scene. It bought the U.S. contractor American Management Systems in 2004, but only started ramping up business after 2008, and accelerated in 2010 with the $1.1 billion acquisition of U.S.-based military IT contractor Stanley Inc. That sent its contracting work through the roof.

Back in 2009, the White House's Recovery Board retained CGI Federal to adapt a well-functioning system it had built for the U.S. Environmental Protection Agency into FederalReporting.gov, another very complex, public-facing and high-volume site that would handle all contracts granted under federal stimulus legislation. This one got built in six weeks, for much less money, and won accolades for its flexibility and reliability.

How did CGI land the Healthcare.gov contract? CGI Federal's winning bid stretches back to 2007, when it was one of 16 companies to get certified on a $4 billion "indefinite delivery, indefinite quantity" contract for upgrading Medicare and Medicaid's systems. Government-Wide Acquisition Contracts — GWACs, as they're affectionately known — allow agencies to issue task orders to pre-vetted companies without going through the full procurement process, but also tend to lock out companies that didn't get on the bandwagon originally. According to USASpending.gov, CGI Federal got a total of $678 million for various services under the contract — including the $93.7 million Healthcare.gov job, which CGI Federal won over three other companies in late 2011.

CGI is only the 29th largest federal IT contractor, with about $950 million in contracts in 2012, compared to number one Lockheed Martin's $14.9 billion. They also don't make high-profile weapons systems, but rather the guts of government Web sites that rarely bear their names.

That said, they've learned quickly, and see the U.S. federal government as their area of biggest growth.

CGI Federal landed the Healthcare.gov contract. Here’s how it fights for the ones it loses.

For CGI, the business of handling the low-income housing program started back in 1999, when the Department of Housing and Urban Development -- under pressure to downsize its in-house operations -- started outsourcing the job to public housing authorities around the country. The housing authorities would subcontract with IT providers like CGI Federal, which mopped up more than 25 percent of the $200-300 million or so in fees that came from HUD every year. CGI, the biggest of all the subcontractors, provides the infrastructure and support to route housing subsidies to landlords and monitor for compliance with HUD rules.

The relationship between contractor and subcontractor is very close. At the Assisted Housing Services Corporation of Ohio, California Affordable Housing Initiatives, and North Tampa Housing Development Corporation, many staff actually list themselves on LinkedIn as CGI employees. The Ohio group's state director, for example, identifies himself as a "Manager of Consulting Services in CGI Federal's Healthcare Compliance Group, focused on business process outsourcing for the Department of Housing and Urban Development." The California group's state director calls himself the same thing, adding that he has "quickly adapted staffing strategies to changing industry conditions in order to maintain and improve competitive position," and has experience "analyzing and interpreting Federal policy and managing the impacts on operations." The Columbus Metropolitan Housing Authority executive named as the Ohio group's contract administrator was a CGI director of consulting services until 2011. So while the "instrumentality" set up by the housing authority is a separate legal actor, it effectively functions as a joint venture with CGI.

In 2007 and 2009, however, HUD's inspector general found that contract administrators had been allowed to overbill the program by tens of millions of dollars. In 2011, HUD decided to rebid the contracts, setting a lower standard for the profit margin that recipients would be allowed to take and a cap on the number of units any one contractor could administer. When the new contracts were awarded -- with a savings of about $100 million, or one third over the previous set, -- many of CGI's partners lost out.

Instead of letting the awards stand, the losers complained en masse to the Government Accountability Office, prompting HUD to back off those awards and offer another solicitation. This time around, HUD got rid of the cap on the number of units a subcontractor could administer, but precluded out-of-state entities from landing a Section 8 contracts if there was a qualified local bidder, which cut into CGI's business model -- GAO ruled that the new process was a no-no. HUD decided to ignore the GAO. So the housing authority-affiliated entities appealed again, this time to the Federal Court of Claims. In April, HUD won. But the companies kicked it up yet another notch, to the Federal Court of Appeals, where arguments were held last week.

(Side note: Lydia DePillis, who authored the two prior articles, has become my favored jounalist du jour, with well researched, easily presented and understood writing in this complex and, well, boring, body of work.)

How federal cronies built -- and botched -- Healthcare.gov

It also doesn't help that many of the organizations involved are now distancing themselves from the whole project, which seems wise given the scale of this disaster. Compare that attitude with the pride many of them exhibited before Healthcare.gov went online, which was being trumpeted as a marvel of cutting-edge Web engineering. Now it's shaping up to be more an example of the efficacy of political connectedness.

CGI Federal: The Company Behind HealthCare.gov and the Insuing Blame Game

Contractors Assign Blame, but Admit No Faults of Their Own, in Health Site

Insight: As Obamacare tech woes mounted, contractor payments soared

The work on Healthcare.gov grew out of a contract for open-ended technology services first issued in 2007 with a place-holder value of $1,000. There were 31 bidders. An extension, awarded in September 2011 specifically to build Healthcare.gov, drew four bidders, the documents show, including CGI Federal.

That 2011 extension is called a "delivery order" rather than a contract because it fell under the original 2007 agreement for CGI Federal to provide IT services to the Centers for Medicare & Medicaid Services, the lead Obamacare agency. CGI Federal reported at the time of the extension that it had received $55.7 million for the first year's work to build Healthcare.gov.

CGI's original 2007 contract was of a type called Indefinite Delivery/Indefinite Quantity, federal records show. ID/IQ contracts allow the government "to write a laundry list of things they can order from the contractor," said Sarah Gleich, an attorney and government procurement expert at Gibson, Dunn & Crutcher. "They'll write incredibly broad descriptions of the work, like 'telecom services,' so you can't tell what they're ordering."

The advantage of an ID/IQ contract, said experts, is that it can be expanded almost indefinitely, without the government having to solicit new bids for additional work. Because "there are very strict regulations on sole-source contracts," an Indefinite Delivery/Indefinite Quantity agreement makes it easier for the government to avoid running afoul of those requirements, said Sajeev Malaveetil, a director at the Berkeley Research Group, a procurement consultant.

IT work is particularly suited to imprecise, open-ended contracts. "Agencies know that at some point they'll need IT services or system implementation," Malaveetil said. "ID/IQ contracts can often be for five or 10 years: the agency just keeps issuing delivery task orders, which fall under the base language of the contract."

CGI spokeswoman Linda Odorisio, there were three one-year options, bringing the total potential value of the contract to $93.7 million. By August 2012, spending on the contract was already close to that limit. This year, the bills skyrocketed. The government spent $27.7 million more in April, an additional $58 million in May and, in its latest outlay, $18.2 million in mid-September. According to the government records, that brought the total spending for CGI's work on Healthcare.gov to $196 million. Adding in potential options, the contract is now valued at $292 million.

"Why this went from a ceiling of $93.7 million to $292 million is hard to fathom," said Scott Amey, general counsel at the Project on Government Oversight, a Washington, D.C.-based watchdog group that analyzes government contracting. "Something changed. It suggests they ran into problems and knew last spring that they couldn't do it for $93.7 million. They just blew through the original ceiling. Where was the contract oversight?"

Obamacare website woes: another sign of out-of-control private contractors

Government outsourcing to private contractors has exploded in the past few decades. Taxpayers funnel hundreds of billions of dollars a year into the chosen companies' pockets, about $80bn of which goes to tech companies.

While the stereotype is that government workers are incompetent, time-wasters drooling over their Texas Instruments keyboards as they amass outsized pensions, studies show that keeping government services in house saves money. In fact, contractor billing rates average an astonishing 83% more than what it would cost to do the work in-house. Hiring workers directly also keeps jobs here in the US, while contractors, especially in the IT space, can ship taxpayer-funded work overseas.

The revelation here is that an overdependence on outsourcing isn't just risky in terms of national security, extortionate at wartime, or harmful because it expands the ranks of low-wage workers; it's also messing with our ability to carry out basic government functions at a reasonable cost.

If we're not going to insource work – presumably because anti-government types successfully peddle the useless bureaucrat stereotype – we should at least have a better process for picking contractors that benefit from taxpayer largesse to carry out public projects. It may be hard to believe in light of the Healthcare.gov experience, but there are examples of successful government outsourcing arrangements in IT. One key to their success, a Government Accountability Office study pointed out, is consistent communication with, and monitoring of, contractors. Penalties for cost overruns, failing to deliver by agreed-upon deadlines and other forms of mismanagement would help, too.

**  Good enough for government work?

James F. Nagle writes in his book, History of Government Contracting, that this pejorative term did not mean what you think it means.

In the early days of the US government, the federal government became dissatisfied with the products they were buying and decided to build them itself, and adopted and implemented strict  standards.  As Professor Nagle put it (p 114 of second edition):

"The rigorous inspection standards gave way to a saying still in use today but with vastly different meaning.  The saying was "close enough for government work."  Originally the saying was a boast by contractors to would-be commercial customers, that their products were so well manufactured that the government would accept them even with its known high standards."

Another government contracting feature of the day noted by Prof. Nagle (on the same page) was,

"an implicit understanding with all arms contractors that they had to share their inventions with the national armories on a royalty-free basis if they wished to continue receiving government contracts. This procedure, exemplifying the public service orientation of the Ordnance Department, allowed novel metal and woodworking techniques [i.e., "information technology"] that had originated in private armories to become part of the public domain."

Buying the unknown, pricing the unknowable

This article will likely confuse most of the procurement staff in local and municipal and probably state governments. It does not fit their typical need. Most things purchased, whether supply, service or work of construction, at local levels are standard commercial products. When you don't have to invent the wheel, there is no need to re-invent it either. Keep it simple and stick to what you know.

But, when developing new products, other acquisition paradigms come into play. No one size fits all and an inflexible means of achieving the acquisition will frustrate the goal. That is my take away from the following article, which I digest below, and which itself is a review by Sandra I. Erwin of a more extensive journal article by Frank Kendall, US Under Secretary of Defense for Acquisition, Technology and Logistics titled "Use of Fixed-Price Incentive Firm (FPIF) Contracts in Development and Production". You have the links, so pick your poison.

Pentagon Acquisition Chief Warns About Misuse of 'Fixed Price' Contracts

Kendall's latest policy guidance tells procurement officials to use "appropriate" contract types. "Unfortunately, sorting this out is not always easy," Kendall writes in the March-April 2013 issue of the Defense Acquisition University journal.

A shift toward fixed-price contract began during the second half of President Obama's first term. Pentagon officials had become increasingly frustrated as too many programs got started and “we find out later on that they were unaffordable,” Kendall says in a February 2012 speech. He cites fixed-price contracting as one of several contracting trends that are embraced and rejected in cycles. In the past two decades, he says, “We have been for-or-against fixed price contracting four or five times."

Kendall's rulebook, known as Better Buying Power, has been interpreted as a mandate to avoid "cost-plus" arrangements where the government agrees upfront to pay a vendor to design a product before it has determined its final price tag.

In the article, titled, "Use of Fixed-Price Incentive Firm Contracts in Development and Production," Kendall cautions buyers that there is no simple benchmark to select a contract type. "The choice of appropriate contract types is very 'situationally' dependent," he says.

Kendall suggests that even though fixed-price contracts do relieve the government from taking on all the risk in a program, if not used properly, such deals could backfire and lead to unneeded court battles.

"Fixed firm price development tends to create situations where neither the government nor the contractor has the flexibility needed to make adjustments as they learn more about what is feasible and affordable as well as what needs to be done to achieve a design that meets requirements," he says.

A fixed-price contract is basically a government “hands off” contract, he adds. "While we can get reports and track progress, we have very little flexibility to respond to cases where the contract requirements may be particularly difficult to achieve."

Shifting the risk to contractors should not be seen as the antidote to the Defense Department's poor track record in predicting costs, Kendall notes. The average EMD (engineering, manufacturing, development) program for a major defense acquisition over the last 20 years has overrun by nearly 30 percent. "Industry can only bear so much of that risk," he says. "It is unrealistic to believe contractors will simply accept large losses. They will not. ... Industry has a finite capacity to absorb that risk and knows how to hire lawyers to help it avoid large losses."

In most cases, says Kendall, there needs to be a "fair sharing" of the risk and rewards of performance. "For good reasons, I am conservative about the use of fixed-price development, but it is appropriate in some cases."

“The government rarely knows what it wants with sufficient specificity to support reasonable fixed prices for evolving, complex or sophisticated products to be delivered years later,” charges John Chierichella, a government contracting attorney at the law firm of Sheppard, Mullin, Richter & Hampton LLP.

He predicts the “latest federal fascination with fixed prices will end like the others — badly — with delayed fielding of the products, contractors deeply damaged by inadequate cash flow, increased claims and litigation, and focused “bail outs” in which the government decides which of the wounded contractors deserves triage.”