contracting officers

Walk This Way — DoD IG Reviews DCMA Contracting Officer Business Systems Deficiencies

The sufficiency and effectiveness of business systems is an essential element in the project management ecosystem.  Far beyond performance measurement of the actual effort, the sufficiency of the business systems to support the effort are essential in its success.  If the systems in place do not properly track and record the transactions behind the work being performed, the credibility of the data is called into question.  Furthermore, support and logistical systems, such as procurement, supply, and material management, contribute in a very real way, to work accomplishment.  If that spare part isn’t in-house on time, the work stops.

In catching up on reading this month, I found that the DoD Inspector General issued a report on October 1 showing that of 21 audits demonstrating business system deficiencies, contracting officer timeliness in meeting DFARS deadlines at various milestones existed in every case.  For example, in 17 of those cases Contracting Officers did not issue final determination letters within 30 days of the report as required by the DFARS.  In eight cases required withholds were not assessed.

For those of you who are unfamiliar with the six business systems assessed under DoD contractor project management, they consist of accounting, estimating, material management, purchasing, earned value management, and government property.  The greater the credibility and fidelity of these systems, the greater level of confidence that the government can have in ensuring that the data received in reporting on execution of public funds under these contracts.

To a certain extent the deadlines under the DFARS are so tightly scheduled that they fail to take into account normal delays in operations.  Forbid that the Contracting Officer may be on leave when the audit is received or is engaged in other detailed negotiations.  In recent years the contracting specialty within the government, like government in general, has been seriously understaffed, underfunded, and unsupported.  Given that oftentimes the best and the brightest soon leave government service for greener pastures in the private sector, what is often left are inexperienced and overworked (though mostly dedicated) personnel who do not have the skills or the time to engage in systems thinking in approaching noted deficiencies in these systems.

This pressure for staff reduction, even in areas that have been decimated by austerity politics, is significant.  In the report I could not help but shake my head when an Excel spreadsheet was identified as the “Contractor Business System Determination Timeline Tracking Tool.”  This reminds me of my initial assignment as a young Navy officer and my first assignment as a contract negotiator where I also performed collateral duties in building simple automated tools.  (This led to me being assigned later as the program manager of the first Navy contract and purchase order management system.) That very first system that I built, however, was tracking contract milestone deadlines.  It was done in VisiCalc and the year was 1984.

That a major procurement agency of the U.S. Department of Defense is still using a simple and ineffective spreadsheet tracking “tool” more than 30 years after my own experience is both depressing and alarming.  There is a long and winding history on why they would find themselves in this condition, but some additional training, which was the agency’s response to the IG, is not going to solve the problem.  In fact, such an approach is so ineffective it’s not even a Band-Aid.  It’s a bureaucratic function of answering the mail.

The reason why it won’t solve the problem is because there is no magic wand to get those additional contract negotiators and contracting officers in place.  The large intern program of recruiting young people from colleges to grow talent and provide people with a promising career track is long gone.  Interdisciplinary and cross-domain expertise required in today’s world to reflect the new realities when procuring products and services are not in the works.  In places where they are being attempted, outmoded personnel classification systems based on older concepts of division of labor stand in the way.

The list of systemic causes could go on, but in the end it’s not in the DCMA response because no one cares, and if they do care, they can’t do anything about it.  It’s not as if “BEST TALENT LEAVES DUE TO PUBLIC HOSTILITY TO PUBLIC SERVICE”  was a headline of any significance.  The Post under Bezos is not going to run that one anytime soon, though we’ve been living under it since 1981.  The old “thank you for your service” line for veterans has become a joke.  Those who use this line might as well say what that really means, which is: “I’m glad it was you and not me.”

The only realistic way to augment an organization in this state in order the break the cycle is to automate the system–and to do it in a way as to tie together the entire system.  When I run into my consulting friends and colleagues and they repeat the mantra: “software doesn’t matter, it’s all based on systems” I can only shake my head.  I have learned to be more tactful.

In today’s world software matters.  Try doing today what we used to do with slide rules, scientific calculators, and process charts absent software.  Compare organizations that use the old division-of-labor, “best of breed” tool concept against those who have integrated their systems and use data across domains effectively.  Now tell me again why “software doesn’t matter.”  Not only does it matter but “software” isn’t all the same.  Some “software” consists of individual apps that do one thing.  Some “software” is designed to address enterprise challenges.  Some “software” is designed not only to enterprise challenges, but also to address the maximization of value in enterprise data.

In the case of procurement and business systems assessment, the only path forward for the agency will be to apply data-driven measures to the underlying systems and tie those assessments into a systemic solution that includes the contracting officers, negotiators, administrators, contracting officer representatives, the auditors, analysts, and management.  One can see, just in writing one line, how much more complex are the requirements for the automated panacea to replace “Contractor Business System Determination Timeline Tracking Tool.”  Is there any question why the “tool” is ineffective?

If this were the 1990s, though the practice still persists, we would sit down, perform systems analysis, outline the systems and subsystem solutions, and then through various stages of project management, design the software system to reflect the actual system in place as if organizational change did not exist.  This is the process that has a 90% failure rate across government and industry.  The level of denial to this figure is so great that I run into IT managers and CIOs every day that fail to know it or, if they do, believe that it will apply to them–and these are brilliant people.  It is selection bias and optimism, with a little (or a lot) of narcissism, run amok.  The physics and math on this are so well documented that you might as well take your organization’s money and go to Vegas with it.  Your local bookie could give you better odds.

The key is risk handling (not the weasel word “management,” not “mitigation” since some risks must simply be accepted, and certainly not the unrealistic term “avoidance”), and the deployment of technology that provides at least a partial solution to the entire problem, augmented by incremental changes to incorporate each system into the overall solution. For example, DeLong and Froomkin’s seminal paper on what they called “The Next Economy” holds true today.  The lack of transparency in software technologies requires a process whereby the market is surveyed, vendors must go through a series of assessments and demonstration tests, and where the selected technology then goes through stage gates: proof-of-concept, pilot, and, eventually deployment.  Success at each level gets rewarded with proceeding to the next step.

Thus, ideally the process includes introducing into the underlying functionality the specific functionality required by the organization through Agile processes where releasable versions of the solution are delivered at the end of each sprint.  One need not be an Agile Cultist to do this.  In my previous post I referred to Neil Killick’s simple checklist for whether you are engaged in Agile.  It is the best and most succinct distillation of both the process and value inherent in Agile that I have found to date, with all of the “woo-woo” taken out.  For an agency as Byzantine as DCMA, this is really the only realistic and effective approach.

DCMA is an essential agency in DoD acquisition management, but it cannot do what it once did under a more favorable funding environment.  To be frank, it didn’t even do its job all that well when a more favorable condition was in place, though things were better.  But this is also a factor in why it finds itself in its current state.  It was punished for its transgressions, perhaps too much.  Several waves of personnel cuts, staff reductions, and domain and corporate knowledge loss on top of the general trend has created an agency in a condition of siege.  As with any organization under siege, backbiting and careerism for those few remaining is rewarded.  Iconoclasts and thought leaders stay for a while before being driven away.  They are seen as being too risky.

This does not create a condition for an agency ready to accept or quickly execute change through new technology.  What it does do is allow portions of the agency to engage in cargo cult change management.  That is, it has the appearance of change but keeps self-interest comfortable and change in its place.  Over time–several years–with the few remaining resources committed to this process, they will work the “change.”  Eventually, they may even get something tangible, though suboptimized to conform to rice bowls; preferably after management has their retirement plans secured.

Still, the reality is that DCMA must be made to do it’s job because it is in the best interests of the U.S. Department of Defense.  The panacea will not be found through “collaboration” with industry, which consists of the companies which DCMA is tasked with overseeing and regulating.  We all know how well deregulation and collaboration has worked in the financial derivatives, banking, mortgage, and stock markets.  Nor will it come from organic efforts within an understaffed and under-resourced agency that will be unable to leverage the best and latest technology solutions under the unforgiving math of organic IT failure rates.  Nor will deploying the long outmoded approach of deploying suboptimized “tools” to address a particular problem.  The proper solution is to leverage effective COTS solutions that facilitate the challenge of systems integration and thinking.

 

 

I Heard It Through the Grapevine — Self Certification of Business Systems

Despite the best of intentions web blogging this week has been sparse, my time filled with contract negotiations and responses to solicitations.  Most recently on my radar is the latest proposed DFARS rule to allow contractors to self-certify their business systems.  Paul Cederwall at Pacific Northwest Government Contracting Update blog has has a lot to say about the rule that is interesting but he gets some important things wrong.

To provide a little background, a DFARS requirement that has been in place since May 18, 2011 established six business systems that must demonstrate accountability and traceability in their internal systems to ensure that there is a high degree of confidence in the integrity of the underlying systems of the contractor receiving award of a government contract.  You can find the language here.  Given that this is the taxpayer’s money, while there was a lot of fear and loathing on how the rule would be applied since it included some teeth–the threat of a withhold on payments–most individuals involved in acquisition reform welcomed it as a means of handling risk given that one of the elements of making an award is “responsibility.”  (This is one leg of the “three-legged stool test” that must be passed prior to a contracting officer making an award, the others being responsiveness, and price and price-related factors.  This last could include value determinations.)

The concept of responsibility is a loaded one, calling on the contracting officer to apply judgment, business knowledge and acumen, and analytical knowledge.  The elements, from the Corporate Findlaw site has a very good summary as follows:

“the FAR requires a prospective contractor to (1) have adequate financial resources to perform the contract; (2) be able to comply with the required or proposed delivery or performance schedule; (3) have a satisfactory performance record; (4) have a satisfactory record of integrity and business ethics; (5) have the necessary organization, experience, accounting and operational controls, and technical skills; (6) have the necessary production, construction, and technical equipment and facilities; and (7) be otherwise qualified and eligible to receive an award under applicable laws and regulations.”

Our acquisition systems, especially in regard to extremely large contracts that will turn into the complex projects that I write about here, tend to be pulled in many directions.  The customer, for example, wants what they need and to reduce the procurement lead time as much as possible.  Those who are given oversight responsibility and concern themselves with financial accountability focus on the need for compliance and integrity in the system, and to ensure that funds are being expended for the purpose contracted and in a manner that will lead to the contractually mandated outcome.  The contractors within the competitive range not only bid to win but their proposals are calibrated to take into account considerations of risk, market share and exposure, strategic positioning, and margin.

Thus, the Six Business Systems rule is a way of meeting the legal requirement of determining responsibility, which is part of the contracting officer’s charter, particularly under the real-world conditions imposed by governmental austerity.  But here is the rub.  When I was an active duty Navy contracting officer we had a great deal of resources at our disposal to ensure that we had done our due diligence prior to award.  The military services and the Department of Defense provided auditing resources to ensure the integrity of financial systems, expose rates during the negotiating process to meet the standard of “fair and reasonable,” and to ensure contract compliance and establish reliable reporting of progress based on those audits.

But things have changed and not always for the better.  During the 1980s and after technology was the first agent for change.  As a matter of fact I was the second project manager of the Navy Procurement System project in San Diego during that time and so was there at the beginning.  The people around me were prescient–despite the remonstrations to the contrary–that such digitization of procurement processes would result not only in improvements in the quality of information and productivity, but also reductions in workforce.  The result was that the federal government lost a great deal of corporate knowledge and wisdom while attempting to weed out suspected Luddites.  Hand-in-hand with this technological development came the rise of government austerity, which has become more, not less, severe over the last thirty years.  Thus the public lost more corporate knowledge and wisdom in the areas most sensitive to such losses.

Over this time criticism of the procurement system has seemed like the easiest horse of convenience to beat, especially in the environment of Washington, D.C.  The contracting officer pool is largely inexperienced.  The most experienced, if they last, are largely overworked, which diminishes effectiveness.  New hires are few and far between, especially given hiring and pay freezes.  Internships and mentoring programs that used to compete with the best of private industry have largely disappeared and most training budgets are either non-existent or bare-boned.  The expected procurement “scandals,” the overwhelming majority of which can be directly traced to the conditions described above as opposed to corruption, fraud, waste, or abuse, resulted.

Because of these conditions, the reaction in terms of ensuring integrity within the systems in lieu of finding scapegoats, was to first establish the Business Systems rule, which is in the best tradition of management.  But, given that things became unexpectedly more austere with government shutdowns and sequestration, the agency tasked with enforcing the rule–the Defense Contract Audit Agency (DCAA)–does not have the resources to complete a full review of the systems of the significant number of contractors that provide supplies and services to the U.S. Department of Defense.  Thus, the latest solution was to propose self-certification–one which was also sought by a good many companies in the industry.

There are criticisms coming from two different perspectives on the rule.  The first is that self-certification is charging the fox with watching the hen house.  The 2006-07 housing bubble and resulting banking crisis is an object lesson of insufficient oversight.

The other criticism comes from many in the industry that sought the change.  The rub here is that teeth were imposed in the process, requiring an annual independent CPA audit.  DCAA will review the results of the audit and the methodology used to make the determination of the certification.  This is where I part with PNWC.  The knee-jerk reaction is to question DCAA’s ability to judge whether the audit was completed properly because, after all, they were not “competent” to complete the audits to begin with.  This is a tautology and not a very good one.

As a leader and manager, if I delegate a task (given that I am usually busy on more pressing issues) and put checks and balances in place in the performance of that task, there will still come the time when I want that individual (or individuals) to present me with an accounting of what they did in the performance of that task.  This is called leadership and management.

The legal responsibility of DCAA in this case in their oversight role is to ensure the integrity of the contractor’s systems so that contracting officers can make awards with confidence to responsible firms.  DCAA is also accountable for the judgment and process in providing that certification.  One can delegate responsibility in the completion of a task but one cannot delegate accountability.

 

Note:  Some formatting errors came out in the initial posting.  Many apologies.

I need a dollar dollar, a dollar is what I need (hey hey) — Contract “harvesting”

Are there financial payoffs in our performance management metrics where money can be recouped?

That certainly seems to be the case in the opinion of some contracting officers and program managers, particularly in a time of budgetary constraints and austerity.  What we are talking about are elements of the project, particularly in aerospace & defense work identified by control accounts within a work breakdown structure (WBS), that are using fewer resources than planned.  Is this real money that can be harvested?

Most recently this question arose from the earned value community, in which positive variances were used as the basis for “harvesting” funds to be used to either de-obligate funds or to add additional work.  The reason for this question lies in traditional methods of using earned value methods to reallocate funds within contract.

For example, the first and most common is in relation to completed accounts which have a positive variance.  That is, accounts where the work is completed and they have underspent their budgeted performance management baseline.  Can the resources left over from that work be reallocated and the variances for the completed accounts be set to 1.0?  The obvious answer to this is, yes.  This constitutes acceptable replanning as long as the contract budget base (CBB) is not increased, and there is no extension to the period of performance.  Replans are an effective means for the program team to rebaseline the time-phased performance management baseline (PMB) to internally allocate resources to address risk on those elements that are not performing well against the plan.  Keep in mind that this scenario is very limited.  It only applies to accounts that are completed where actual money will not be expended for effort within the original control accounts.  Also, these resources should be accounted for within the project by first being allocated to undistributed budget (UB), since this money was authorized for specific work.  Contracting officers and the customer program manager will then direct where these undistributed funds will be allocated, whether that be to particular control accounts or to management reserve (MR).

In addition to replanning, there are reprogamming and single point adjustment examples–all of which are adequately covered here and here.

But the issue is not one related to EVM.  The reason I believe it is not lies in the purpose of earned value management as a project management indicator: it measures the achievement (volume) of work against a financial plan in order to derive the value of the work performed at any particular stage in the life of a project.  It does this not only as an oversight and assessment mechanism, but also to provide early warning of the manifestation of risk that threatens the successful execution of the project.  Thus, though it began life in the financial management community to derive the value of work performed at a moment in the project plan, it is not a financial management tool.  The “money” identified in our earned value management systems is not real in the sense that it exists, other than as an indicator of progress against a financial plan of work accomplishment.  To treat this as actual money is to commit the fallacy of reification.  That is, to treat an abstraction as if it is the real thing.

The proper place to determine the availability of funds lies in the financial accounting system.  The method used for determining funds, particularly in government related contract work, is to first understand the terminology and concepts of funding.  Funds can be committed, obligated, or expended.  Funds are committed when they are set aside administratively to cover an anticipated liability.  Funds are obligated when there is a binding agreement in place, such as a contract or purchase order.  Funds are expended when the obligation is paid.

From a contracting perspective, commitments are generally available because they have not been obligated.  Obligated funds can be recovered under certain circumstances as determined by the rules relating to termination liability.  Thus, the portion of the effort in which funds are de-obligated is considered to be a termination for convenience.  Thus, we find our answer to the issue of “harvesting.”

Funds can be de-obligated from a contract as long as sufficient funds remain on the contract to cover the amount of the remaining obligation plus any termination liability.  If the contracting officer and program manager wish to use “excess” funds due to the fact that the project is performing better than anticipated under the negotiated contract budget base, then they have the ability to de-obligate those funds.  That money then belongs to the source of the funding, not the contracting officer or the program manager, unless one of them is the “owner” of the funds, that is, in government parlance, the budget holder.  Tradeoffs outside of the original effort, particularly those requiring new work, must be documented with a contract modification.

From an earned value management and project management perspective, then, we now know what to do.  For control accounts that are completed we maintain the history of the effort, even though the “excess” funds being de-obligated from the contract are reflected in positive variances.  For control accounts modified by the de-obligation in mid-effort, we rebaseline that work.  New work is added to the project plan separately and performance tracked in according to the guidance found in the systems description of the project.

One note of caution:  I have seen where contracting officers in Department of Defense work rely on the Contract Funds Status Reports (CFSR) to determine the availability of funds for de-obligation.  The CFSR is a projection of funding obligations and expenditures within the project and does not constitute a contractual obligation on the burn rate of funding.  Actual obligations and expenditures will vary by all of the usual circumstances that affect project and contract performance.  Thus, contracting officers who rely on this document risk both disrupting project management execution and running into an Anti-Deficiency Act violation.

In summary, apart from the external circumstances of a tight budgetary environment that has placed extra emphasis on identifying resources, good financial management housekeeping dictates that accountable personnel as a matter of course be diligent in identifying and recouping uncommitted, unobligated, and unexpended funds.  This is the “carry-over” often referred to by public administration professionals.  That earned value is used as an early indicator of these groups is a proactive practice.  But contracting officers and program managers must understand that it is only that–an indicator.

These professionals must also understand the nature of the work and the manner of planning.  I have seen cases, particularly in software development efforts, where risk did not manifest in certain accounts until the last 5% to 10% of work was scheduled to be performed.  No doubt this was due to front-loaded planning, pushing risk to the right, and some other defects in project structure, processes, and planning.  Regardless, these conditions exist and it behooves contracting and project professionals to be aware that work that appears to be performing ahead of cost and schedule plans may reflect a transient condition.

Note:  This content of this article was greatly influenced by the good work of Michael Pelkey in the Office of the Secretary of Defense, though I take full responsibility for the opinions expressed herein, which are my own.