Obama signs law to reform weapons buying

The law puts checks on big-ticket weapons acquisitions to keep them on schedule and hold down costs.

President Barack Obama signed legislation yesterday to change how the Defense Department buys and tracks acquisitions of major weapons systems.

“When it comes to purchasing weapons systems and developing defense projects, the choice we face is between investments that are designed to keep the American people safe and those that are simply designed to make a defense company or a contractor rich,” Obama said before signing the bill.

The Weapons Systems Acquisition Reform Act (S. 454) requires DOD to appoint senior officials to assess a project’s performance and analyze underlying causes for any of its shortcomings, such as unrealistic expectations, too little funding, or poor work by a contractor or DOD.

It requires officials to encourage competition, including 10 competition-promoting measures to consider when setting acquisition strategies. It also deals with organizational conflicts of interest, requires a study of earned value management, and sets checkpoints at certain milestones in projects.

The law's purpose is to limit cost overruns before they spiral out of control, Obama said. "Wasteful spending comes from exotic requirements, lack of oversight and indefensible no-bid contracts."

Obama also said this is the first step in fixing how the government buys things. “It reforms a system where taxpayers are charged too much for weapons systems that too often arrive late,” he said. Obama signed a memo March 4 designed to improve the procurement system.

However, acquisition experts say the vast majority of purchases are received as agencies requested.

“By and large the government gets what it wants, when it wants it, for the price it’s wiling to pay,” said Alan Chvotkin, executive vice president and counsel at the Professional Services Council, who spoke this week at a panel discussion about the federal acquisition workforce. However, he said the procurement system still has room for improvements.

At the same discussion, Steven Schooner, an associate law professor and co-director of the Government Procurement Law Program at George Washington University, pointed out the Obama administration views contractors as lining their pockets at the taxpayers’ expense. Schooner said the president, Congress and the news media can’t treat contractors as pariahs because the government can’t operate without contractors’ support.

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17 words that will change acquisition

Buried deep within the $787 billion economic stimulus law is a small provision, barely noticeable on a quick skim, that could well change the federal government’s procurement practices for years to come.

The provision is just 56 words long, and the core of it is only 17: “To the maximum extent possible, contracts funded under this act shall be awarded as fixed-price contracts.”

President Barack Obama frequently promises change, but the procurement approach of setting a price first and then proceeding with work is old school. Other approaches to federal contracts, such as cost-reimbursement and no-bid awards, have emerged in recent years to give procurement officials more flexibility while accepting more risk.

Obama’s Office of Management and Budget now calls fixed-price contracts “safe investments” for the massive amounts of taxpayer funds going out the door in the stimulus package. Last year, Democratic lawmakers clamped down on cost-plus contracts in the fiscal 2009 National Defense Authorization Act, which became law Oct. 14, 2008. And now, the American Recovery and Reinvestment Act that Obama signed Feb. 17 includes the provision that limits contracts as much as possible to those with fixed prices.

However, many procurement experts are critical, worried that the administration is limiting the use of other contract approaches that have a legitimate place in a contracting officer’s toolbox.

It’s an old debate. While proponents say fixed-price contracts commit companies to performing work for a set amount and allow agencies to budget appropriately, some experts say other contract types offer a flexibility that is necessary in certain situations. And, they add, fixed-price contracts can eventually cost the government more because contractors are likely to base their bids on the upper end of their expected costs. Other contract types, such as cost-plus, allow agencies to pay less if the final cost to the contractor is closer to the lower end of the range.

Many see fixed-price contracts as “the panacea for waste, fraud and abuse,” said Ellen Brown, former legislative director for the Republican staff of the House Oversight and Government Reform Committee. “Those of us who understand government procurement…know it’s not true.”

Avoid risk

In their fiscal 2010 budget proposal, titled “A New Era of Responsibility,” Obama administration officials wrote that cost-type contracts -- any of several kinds that start with the actual cost as a base and adjust the final price to include such things as a profit margin or an incentive for superior work -- are particularly vulnerable to exploitation. Such contracts offer no incentive for companies to control costs, they wrote, adding that those contracts increased 75 percent under President George W. Bush.

Furthermore, many lawmakers have said they believe contractors often take advantage of the government, especially when agencies enter into agreements in which prices aren’t set from the beginning.

The Obama administration said the stimulus package seeks to halt such abuses. Office of Management and Budget officials said agencies should ensure reasonable contractor risk and economic performance when selecting the contract type for a project that will use stimulus money.

“Fixed-price contracts provide maximum incentive for the contractor to control costs and perform effectively and impose a minimum burden upon the contracting parties,” OMB Director Peter Orszag wrote in a memo issued Feb. 18. “These contracts expose the government to the least risk.”

When an agency proposes using a riskier type of contract, it must first make certain it has evaluated all alternatives, Orszag wrote. If the agency doesn’t choose the fixed-price approach, officials must appoint an appropriate number of qualified acquisition employees to oversee the contract.

In his address to Congress Feb. 24, Obama said Cabinet secretaries — just like the mayors and governors who will receive stimulus money — are accountable to him and to the American people for the money they spend.

“Here in Washington, we’ve all seen how quickly good intentions can turn into broken promises and wasteful spending,” Obama said. The administration plans to track stimulus spending at a Web site called Recovery.gov.

Casting a dark shadow

Recovery.gov features another measure that more subtly nudges agencies to choose fixed-price contracts: Other kinds of contracts and sole-source awards must be posted in a special section of Recovery.gov.

“A summary of any contract awarded with such funds that is not fixed-price and not awarded using competitive procedures shall be posted in a special section of the Web site,” the legislation states.

Stan Soloway, president and chief executive officer of the Professional Services Council, an industry trade group, said that approach puts contracting officers under pressure to keep their work out of the spotlight. Posting the information in a separate section could cast a dark shadow over the contract by implying there’s something unsuitable about it, even when it might be the best kind of contract for that procurement, Soloway said.

Contracting officers prefer to do their work in quiet obscurity, but they can face significant repercussions for making bad acquisition choices. “They already feel like they’re on the front lines,” Soloway said.

One contracting officer, who spoke on condition of anonymity because he is not authorized to discuss legislation, criticized the micromanaging nature of the provision. “When are they going to stop telling me how to do my job?” he asked.

The officer said he and his fellow professionals understand the procurement process better than members of Congress do. Although lawmakers act like they know the process as well as the people in the field do, he said, they fail to recognize that contracting officers need many options for finding the best fit for agencies seeking a contractor’s services.

Learn from the past

In an era in which development proceeds rapidly in areas such as back-office information technology systems and military combat systems, contracting lessons from a decade ago can offer insight.

Computer software development expanded rapidly in the 1990s. However, it was still new, and agencies struggled to write clear definitions when buying new software that would work with old systems. At the time, the government used fixed-price contracts to buy software, Brown said. With the companies taking on the risk, the government paid a lot more for the software.

“Fixed-price contracts are completely appropriate when we know what we’re going to buy,” said Paul Kaminski, chairman of a National Research Council study on systems engineering for the Defense Department and undersecretary of Defense for acquisition and technology from 1994 to 1997. If there’s uncertainty, “I think we end up on the wrong end of the bargain negotiating a fixed-price contract.”

Experts agree that returning to the era of fixed-price contracts won’t protect the government from ballooning costs and could even lead to overpriced contracts.

Sen. Joe Lieberman (I-Conn.), chairman of the Homeland Security and Governmental Affairs Committee, said fixed-price contracts aren’t a simple solution to saving money, but they do work in certain circumstances.

“No acquisition of any kind, however diligent, can overcome a fatally flawed statement of work,” said Elliott Branch, executive director of contracts at the Naval Sea Systems Command.

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Obama: Big changes coming in federal contracting

President Barack Obama said he wants an overhaul of government contracting and signed a presidential memorandum to launch the effort today.

“It’s time for this waste and inefficiency to end,” he said at a news conference. “It’s time for a government that only invests in what works.” (Read a transcript of his comments.)

Obama said the Office of Management and Budget will issue governmentwide guidance by Sept. 30 on the appropriate use and oversight of sole-source and other types of noncompetitive contracts. But he added that he wants to see more full and open competition for contracts.

By July 1, OMB will develop more detailed guidance to help agencies review their existing contracts to identify wasteful ones that are unlikely to meet their needs, the memo states.

Obama said he wants agencies to better oversee all types of contracts and carefully consider the agencies’ needs before signing any deal. The changes would minimize the risks for government and boost the value of contracts, he said.

“We will end unnecessary no-bid contracts and cost-plus contracts that run up the bill that is paid by the American people,” he said. The reforms would save the government $40 billion each year, he added.

Obama also wants to clarify when it’s appropriate to outsource federal work and help agencies find the appropriate size and experience for the federal employees who develop and oversee acquisitions.

Obama focused largely on defense contracting but said the reforms will span all agencies. He cited a 2008 Government Accountability Office study of 95 Defense Department weapon programs that found cost overruns of $295 billion and average delays of 21 months.

“I can assure you that this will be a priority for my administration," Obama said. "It’s time to end the extra costs and long delays that are all too common in our defense contracting.”

Obama said he wants agencies to enter into contracts that will bring value, adding that agencies have wasted money through poor planning while giving contractors ample opportunities to take advantage of the government.

“It is essential that the federal government have the capacity to carry out robust and thorough management and oversight of its contracts,” the memo states.

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Experts: Value beats price to avoid fake IT

As government regulators consider tougher ways to block counterfeit information technology products from entering the federal marketplace, they’re restarting an old debate about whether to award contracts based on the lowest bid or the best value.

At a meeting Dec. 11 regarding newly proposed rules on counterfeit IT, Laura Auletta, a procurement policy analyst at the Office of Federal Procurement Policy, said she was surprised to hear that contracting officers believe they should award a contract to the lowest bidder to save money instead of finding the best value.

Contracting officers and acquisition officials often interpret the Federal Acquisition Regulation to mean that the lowest bid should get the award, said James Bockman, a former NASA official who worked closely with the agency’s procurement employees.

“They see that as saving the government money,” said Bockman, who is now a special projects engineer at Aerospace Corp.

The FAR gives civilian agencies broad discretion in making decisions based on price or other best-value parameters, such as the company’s experience and management capabilities. But government and industry experts say acquisition workers are concerned about making a mistake and paying for it with a career-ending embarrassment. With today’s emphasis on curbing waste and abuse, they say contracting officers often choose the vendor with the lowest price.

However, federal officials agree that the government should strive for quality and ensure that agencies don’t buy products that are tainted with malware or poorly made.

The prevalence of counterfeit IT and electronic parts has exploded in the past five years after roughly 20 years of level numbers, officials say.

“The whole supply chain is infected with counterfeit parts,” said Brian Hughitt, manager of quality assurance at NASA’s Safety and Assurance Requirements Division.

The sudden increase has led regulators to add tougher checks to the FAR. Counterfeit IT products lead to financial losses for government agencies and companies, and they pose a threat to national security, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council wrote in a Nov. 18 Federal Register notice.

The new rules’ draft language would require agencies to buy all IT products from original equipment manufacturers, software developers, or authorized distributors or resellers. In addition, agencies would have to require companies to offer proof in contract proposals that their products are authentic.

Edward Chambers, a procurement analyst at the General Services Administration who is leading the regulatory proposal, tried to allay initial concerns from industry and government officials by saying the language is preliminary.

At the meeting, government officials disagreed about who’s to blame if an agency buys fake IT or electronic parts. Hughitt said a federal employee should take no blame if an agency buys a phony product because the contractor should know what it’s selling to the government.

However, the government does not use rigorous scrutiny when evaluating products, said Brad Botwin, director of industrial studies at the Commerce Department.

“The sloppiest processes are on this side of the house,” he said, referring to the government, particularly the Defense Logistics Agency. The liability for counterfeit parts rests on contractors and the government.

As the debate continues, officials say they need to find a way to increase scrutiny without putting companies out of business. But the checks are necessary because counterfeit products will continue to be a problem, Botwin said.

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Watchdogs make industry leery

Federal contractors must report evidence of crimes to inspectors general under new requirements

Contracting officers and government contractors will soon have someone new in their relationship: a watchdog.

Starting Dec. 12, contractors will be required to tell government officials if they find evidence of criminal activities related to a federal contract or if the government overpays them. The new rules allow federal officials to suspend or even debar a company from government work if the company knowingly fails to inform officials.

Experts say contractors are most concerned about the requirement that they inform two parties: the appropriate contracting officer and the agency’s inspector general.

Most contractors’ mistakes, including accidental overpayments, are minor administrative errors that contracting officers can easily fix, government and industry experts say. But because IGs have different responsibilities from contracting officers, the mandate makes contractors anxious about sharing even minor infractions with IGs.

“The rule goes too far,” said David Drabkin, deputy chief acquisition officer at the General Services Administration, adding that it won’t help relationships among contractors, agencies and IGs.

However, regulators say they wrote the rules with contractors in mind. They offer flexibility and allow companies to find credible evidence of a crime before reporting it. For agencies, reporting requirements will encourage relationships between IGs and contracting officers as they work together to root out fraud, regulators say.

The rules will have “contractors turning square corners and everybody walking with that halo over their head,” said Ernest Woodson, a procurement analyst at GSA who was instrumental in writing the regulations.

The sea change
The revision to the Federal Acquisition Regulation stands as a reversal from long-standing policies of voluntary disclosure.

“There is no doubt that mandatory disclosure is a sea change and major departure,” the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council wrote in a Federal Register notice outlining the rule.

But the councils said contractors have largely ignored voluntary disclosure policies for the past decade, as the Justice Department and the National Procurement Fraud Task Force have also charged. In May 2007, the department and task force proposed the FAR changes to Robert Burton, then deputy administrator of the Office of Federal Procurement Policy and now a partner at the Venable law firm.

“We believe that if the FAR were more explicit in requiring such notification, it would serve to emphasize the critical importance of integrity in contracting,” they wrote. The new mandates stemmed from that letter.

Burton said the rules will encourage contractors to institute vigorous processes for reporting internal criminal allegations and quickly reviewing the merits of those claims.

“The rule will add weight to the arguments inside a corporation that good business practices in the long run favor compliance and disclosure,” the councils wrote.

Lesley Field, acting OFPP administrator, said mandatory reporting is a sound business ethic and should already be part of companies’ standards.

Contractors might be more comfortable leaving the IG out of the process, but regulators say disclosing a crime to the contracting officer isn’t enough because he or she is in no position to evaluate criminal actions.

“Contracting officers truly wouldn’t know what to do,” Woodson said. “We don’t want the contracting officer interfering with an investigation that the IG or the Department of Justice may have to get involved with.”

Essentially, regulators want those crimes referred immediately to people with badges.

In a speech in November, James Graham, a trial lawyer in the Justice's Criminal Division, said the proposal should improve procurement oversight when mistakes or criminal activities happen. Graham later told reporters that notifying the IG would make the contracting officer and IG work more closely together.

Graham, who also helped craft the regulations, said that although most contractors are honest, fraud is always possible, and the tendency toward corruption is constant.

“It’s the human condition,” he said.

Altering relationships
In public comments on the rule, many people disagreed with the mandate. One wrote that in 1986 a proposal from the Defense Department to make fraud disclosures mandatory foundered. In 1989, then-Defense Secretary Dick Cheney withdrew a proposed mandatory reporting rule on the grounds that “to be meaningful, corporate codes of conduct must be adopted by contractors voluntarily, not mandated in procurement regulations.”

Similarly, Elliott Branch, executive director of contracts at the Naval Sea Systems Command, said there must be a cultural shift in contractors’ thinking or the rules could be meaningless.

Many observers also say the new rules would likely keep the parties at a distance so they can avoid the appearance of wrongdoing.

“It could have a chilling effect on relationships between the contracting officer and the contractor,” Burton said.

Contracting officers and IGs view contractors through different lenses, said Michael Mason, a partner at the Hogan and Hartson law firm. For instance, contracting officers see companies as business partners that are trying to accomplish a contractual job for the agency. But IGs are the government’s watchdogs. They’re trained to sniff out fraud, waste and abuse and expose it. Experts say that focus will strain government/industry relations.

In public comments to the Federal Register, some industry representatives said reporting activities to the IG would take the ability to settle and resolve issues away from the contracting officer and agency. It undercuts the contracting officer’s right to handle a contract, they argued.

Furthermore, IGs have limited resources and staff, and disclosures will slow the procurement process, some commenters said.

Flexibilities
Regulators say they realized that the rules would place more burdens on contractors. Therefore, they granted contractors flexibilities within the rules in an attempt to strike a balance.

“We want disclosure,” said a Bush administration official who requested anonymity. “On the other hand, we want to show some semblance of fairness where there’s uncertainty.”

When learning of an alleged crime, contractors can investigate the credibility of the allegation before telling the government, the official said, adding that “rumors are not enough to trigger the disclosure requirement.”

Until the contractor has determined the allegation’s credibility, federal officials can’t charge the contractor with knowingly failing to inform government officials. Regulators also declined to set specific timelines, saying they would be arbitrary and cause more problems than they would solve.

Despite regulators’ efforts to ease the burden on contractors, the industry remains unenthusiastic, said Richard Bednar, senior counsel at the Washington office of law firm Crowell and Moring and coordinator of the Defense Industry Initiative on Business Ethics and Conduct. In the end, contractors might focus on the rule’s loopholes and report fewer incidents.

But Bednar said the councils clarified many of the uncertainties when they published the final version of the proposed rule. Contractors can respond to the rules by “pulling up their socks and being responsible contractors,” he said.

"I do think it’s digestible,” he added.

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Bill would put more eyes on purchase cards

Federal employees who use government purchase cards could have more eyes watching them.

Under the Government Credit Card Abuse Prevention Act (S. 789), the IGs would have to regularly report to the Office of Management and Budget about violations and punishments, as well as agency trends that might lead to improper behaviors. They would also suggest other ways of aggregating an agency’s spending, according to the bill.

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Restrictions seen hurting disaster recovery

Federal Emergency Management Agency officials should work with chief procurement regulators to avoid limits to subcontracting that could strain efforts to respond quickly to disasters such as Hurricane Katrina, according to a new report.

Richard Skinner, the Homeland Security Department's inspector general, wrote in a report released Aug. 4 that legislation passed by Congress in 2006 that restricts subcontracting by prime contractors could inhibit disaster responses and recovery work by FEMA or other DHS agencies.

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Committee approves Williams nomination

The nomination of Jim Williams as administrator of the General Services Administration was approved unanimously today by the Senate Homeland Security and Governmental Affairs Committee and sent to the full Senate.

Sen. Joe Lieberman (I-Conn.), the committee’s chairman, said he was satisfied with Williams’ answers regarding a controversy involving Sun Microsystems, and called Williams an outstanding candidate for the position.

Lieberman and the committee's ranking member, Sen. Susan Collins (R-Maine), said they questioned Williams extensively regarding his role in renegotiations of a contract with Sun, which stirred controversy. The contract raised concerns about whether the company had not provided the government with the appropriate discounts on its products and services.

“I don’t know if his actions were perfect in retrospect, but I am convinced that his motivations were always in the best interest of the taxpayers,” Collins said. “I believe he is the ideal person for this position at a very critical time.”

However, as reported July 29, Sen. Charles Grassley (R-Iowa) is expected put a hold on the nomination, which would keep the Senate from considering Williams. (Read more here.)

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SBA faulted on set-aside check

“Faith-based contracting” doesn’t bring out the best in people. In those situations, “we sit back and hope and pray the company we’re doing business with isn’t ripping us off too badly,” said Bruce Causseaux, a senior-level specialist for forensic audits and special investigations at the Government Accountability Office.

Causseaux said the Small Business Administration appears to be taking that approach with its Historically Underutilized Business Zone program, which is designed to provide federal contracting opportunities to businesses in low-income areas.

During a recent investigation, GAO auditors found numerous examples of ineligible companies being accepted into the HUBZone program.

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Committees want reports on contractors

Leaders in the intelligence community would have to keep closer tabs on what contractors are doing in their agencies under bills pending in Congress.

Some members of Congress have proposed one-time, comprehensive reports on contractors under the House and Senate versions of the fiscal 2009 Intelligence Authorization Act, H.R. 5959 and S. 2996.

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Officials: HUBZone program is open to fraud

Investigators uncovered serious lapses in a Small Business Administration contracting program after they received set-aside small business status by using false identification, officials said today.

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Sen. Kerry: SBA must protect whistleblowers

When Small Business Administration officials pried into the e-mail inbox of an employee supplying anonymous testimony to the Senate Small Business and Entrepreneurship Committee, the committee chairman said the result could have a chilling effect on oversight.

Employees can’t be guaranteed confidentiality when managers arbitrarily look into employee’s e-mail messages, Sen. John Kerry (D-Mass.) wrote in a letter, which he sent today to SBA Administrator Steve Preston.

The letter is based on a report from SBA’s inspector general that was released in October. The IG found that a manager in the Office of Disaster Assistance retrieved e-mail messages from an employee who was a confidential source for the IG and Kerry’s committee.

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DOD sets limits for lead systems integrators

Lead systems integrators cannot have a financial interest in a major acquisition when they are working closely with the Defense Department on the details of that purchase or one related to it, under a new interim rule.

The rule is a response to congressional concerns. Lawmakers said they are concerned about conflicts of interest and the potential for a company to end up evaluating itself or its competitors in making contract awards, according to a Senate report on the bill.

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IG: DOD fails on competition

The Defense Department awarded numerous task orders without competition, and it failed to justify why officials went outside of the department for acquisition services, a new report found.

The DOD inspector general audited 98 task orders worth $33.2 million in commercial supplies purchased through the National Institutes of Health’s Electronic Commodities Store III governmentwide acquisition contract. Of those orders, 95 failed to afford all contractors a chance to bid. And on 31 of the orders, contracting officers did not document their reasons for the award, the report states.

“Competition was limited, and DOD did not have assurance it received the best value when procuring goods,” the IG concludes.

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Congress endorses GSA's assisted services

Lawmakers want the Defense Department to use the General Services Administration’s assisted acquisition services so DOD experts are free to work on defense-specific procurements.

That congressional endorsement in a conference report on DOD’s fiscal 2008 spending bill was welcome news at GSA, which faces shrinking revenues from its assisted acquisition services and fresh criticism from DOD’s inspector general.

The reports highlight divergent views among oversight officials: Congress likes GSA’s assisted services, while DOD’s IG questions their value. The lawmakers’ endorsement came two weeks after DOD’s IG told employees to stop wasting money on GSA’s assisted services.

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GSA lashes back at DOD IG

A top General Services Administration official said today he was very disappointed by a report from the Defense Department’s inspector general condemning the Air Force for wasting money by using GSA’s assisted-acquisition services.

The report states that DOD wasted $607,000 when it turned to GSA for help in placing 91 orders on an Air Force task-order contract known as Network-Centric Solutions. Officials should have used DOD resources to handle the work and put the money to better use supporting the warfighters, the report states.

“Frankly I take great offense at that.... I don’t appreciate it, and I think they got it dead wrong,” said Jim Williams, commissioner of GSA’s Federal Acquisition Service.

Williams said the Air Force had three options in such a circumstance: It could have failed its mission by not doing the work; the service could have handled the work in-house despite its already overworked acquisition staff and still faced failure; or the Air Force could have gone to GSA for help.

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IG: DOD wasted money by placing orders with GSA

The Defense Department wasted more than $600,000 when it turned to the General Services Administration for help in placing orders on an Air Force task-order contract, according to a new report from DOD’s inspector general.

The IG said the officials should have sought assistance from DOD’s procurement officers, not GSA, for the orders placed under the Network-Centric Solutions (NetCents) contract.

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Congress looks for price fix

Regulators left a gap in a final rule on time-and-materials contracts that lawmakers say exceeds the authority that Congress granted. Now, lawmakers want to close that gap and curtail the use of such contracts.

The Senate Armed Services Committee said contractors can defraud the government too easily through time-and-materials contracts because departments have a hard time monitoring the work and ensuring that the prices they pay are fair.

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Grassley: Sun controversy a sign of deeper contracting problems

Sen. Charles Grassley (R-Iowa) and the General Services Administration are sparring again over the Sun Microsystems contracting controversy, a week after the company let its schedules contract expire.

Grassley said he wants to know if the Sun case reflects deeper problems with how the government negotiates and manages contracts, leading to contracts that benefit vendors at the expense of taxpayer dollars.

GSA said he's using "false innuendo to impugn the motives of GSA management."

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Last-minute spending hurts IRS, IG says

The Internal Revenue Service’s end-of-year spending increased dramatically in the past five fiscal years, according to a new report.

The overload of work coming at the last minute caused problems in acquisitions. On 15 percent of 92 purchases in August and September 2006, TIGTA found that IRS violated appropriations regulations on four acquisitions, and contracting officers may have skipped steps in the procurement process on 10 others, the report states.

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