government contracting

Back to School Daze Blogging–DCMA Investigation on POGO, DDSTOP, $600 Ashtrays,and Epistemic Sunk Costs

Family summer visits and trips are in the rear view–as well as the simultaneous demands of balancing the responsibilities of a, you know, day job–and so it is time to take up blogging once again.

I will return to my running topic of Integrated Program and Project Management in short order, but a topic of more immediate interest concerns the article that appeared on the website for pogo.org last week entitled “Pentagon’s Contracting Gurus Mismanaged Their Own Contracts.” Such provocative headlines are part and parcel of organizations like POGO, which have an agenda that seems to cross the line between reasonable concern and unhinged outrage with a tinge conspiracy mongering. But the content of the article itself is accurate and well written, if also somewhat ripe with overstatement, so I think it useful to unpack what it says and what it means.

POGO and Its Sources

The source of the article comes from three sources regarding an internal Defense Contract Management Agency (DCMA) IT project known as the Integrated Workflow Management System (IWMS). These consist of a September 2017 preliminary investigative report, an April 2018 internal memo, and a draft of the final report.

POGO begins the article by stating that DCMA administers over $5 trillion in contracts for the Department of Defense. The article erroneously asserts that it also negotiates these contracts, apparently not understanding the process of contract oversight and administration. The cost of IWMS was apparently $46.6M and the investigation into the management and administration of the program was initiated by the then-Commander of DCMA, Lieutenant General Wendy Masiello, shortly before she retired from the government in May 2017.

The implication here, given the headline, seems to be that if there is a problem in internal management within the agency, then that would translate into questioning its administration of the $5 trillion in contract value. I view it differently, given that I understand that there are separate lines of responsibility in the agency that do not overlap, particularly in IT. Of the $46.6M there is a question of whether $17M in value was properly funded. More on this below, but note that, to put things in perspective, $46.6M is .000932% of DCMA’s oversight responsibility. This is aside from the fact that the comparison is not quite correct, given that the CIO had his own budget, which was somewhat smaller and unrelated to the $5 trillion figure. But I think it important to note that POGO’s headline and the introduction of figures, while sounding authoritative, are irrelevant to the findings of the internal investigation and draft report. This is a scare story using scare numbers, particularly given the lack of context. I had some direct experience in my military career with issues inspired by the POGO’s founders’ agenda that I will cover below.

In addition to the internal investigation on IWMS, there was also an inspector general (IG) investigation of thirteen IT services contracts that resulted in what can only be described as pedestrian procedural discrepancies that are easily correctable, despite the typically overblown language found in most IG reports. Thus, I will concentrate on this post on the more serious findings of the internal investigation.

My Own Experience with DCMA

A note at this point on full disclosure: I have done business with and continue to do business with DCMA, both as a paid supplier of software solutions, and have interacted with DCMA personnel at publicly attended professional forums and workshops. I have no direct connection, as far as I am aware, to the IWMS program, though given that the assessment is to the IT organization, it is possible that there was an indirect relationship. I have met Lieutenant General Masiello and dealt with some of her subordinates not only during her time at DCMA, but also in some of her previous assignments in Air Force. I always found her to be an honest and diligent officer and respect her judgment. Her distinguished career speaks for itself. I have talked on the telephone to some of the individuals mentioned in the article on unrelated matters, and was aware of their oversight of some of my own efforts. My familiarity with all of them was both businesslike and brief.

As a supplier to DCMA my own contracts and the personnel that administer them were, from time-to-time, affected by the fallout from what I now know to have occurred. Rumors have swirled in our industry regarding the alleged mismanagement of an IT program in DCMA, but until the POGO article, the reasons for things such as a temporary freeze and review of existing IT programs and other actions were viewed as part and parcel of managing a large organization. I guess the explanation is now clear.

The Findings of the Investigation

The issue at hand is largely surrounding the method of source selection, which may have constituted a conflict of interest, and the type of money that was used to fund the program. In reading the report I was reminded of what Glen Alleman recently wrote in his blog entitled “DDSTOP: The Saga Continues.” The acronym DDSTOP means: Don’t Do Stupid Things On Purpose.

There is actually an economic behavioral principle for DDSTOP that explains why people make and double down on bad decisions and irrational beliefs. It is called epistemic sunk cost. It is what causes people to double down in gambling (to the great benefit of the house), to persist in mistaken beliefs, and, as stated in the link above, to “persist with the option which they have already invested in and resist changing to another option that might be more suitable regarding the future requirements of the situation.” The findings seem to document a situation that fits this last description.

In going over the findings of the report, it appears that IWMS’s program violated the following:

a. Contractual efforts in the program that were appropriate for the use of Research, Development, Test and Evaluation (R,D,T & E) funds as opposed to those appropriate for O&M (Operations and Maintenance) funds. What the U.S. Department of Defense calls “color of money.”

b. Amounts that were expended on contract that exceeded the authorized funding documents, which is largely based on the findings regarding the appropriate color of money. This would constitute a serious violation known as an Anti-Deficiency Act violation which, in layman’s terms, is directed to punish public employees for the misappropriation of government funds.

c. Expended amounts of O&M that exceeded the authorized levels.

d. Poor or non-existent program management and cost performance management.

e. Inappropriate contracting vehicles that, taken together, sidestepped more stringent oversight, aside from the award of a software solutions contract to the same company that defined the agency’s requirements.

Some of these are procedural and some are serious, particularly the Anti-deficiency Act (ADA) violations, are serious. In the Contracting Officer’s rulebook, you can withstand pedestrian procedural and administrative findings that are part and parcel of running an intensive contracting organization that acquires a multitude of supplies and services under deadline. But an ADA violation is the deadly one, since it is a violation of statute.

As a result of these findings, the recommendation is for DCMA to lose acquisition authority over the DoD micro-contracting level ($10,000). Organizationally and procedurally, this is a significant and mission-disruptive recommendation.

The Role and Importance of DCMA

DCMA performs an important role in contract compliance and oversight to ensure that public monies are spent properly and for the intended purpose. They perform this role mostly on contracts that are negotiated and entered into by other agencies and the military services within the Department of Defense, where they are assigned contract administration duties. Thus, the fact that DCMA’s internal IT acquisition systems and procedures were problematic is embarrassing.

But some perspective is necessary because there is a drive by some more extreme elements in Congress and elsewhere that would like to see the elimination of the agency. I believe that this would be a grave mistake. As John F. Kennedy is quoted as having said: “You don’t tear your fences down unless you know why they were put up.”

For those of you who were not around prior to the formation of DCMA or its predecessor organization, the Defense Contract Management Command (DCMC), it is important to note that the formation of the agency is a result of acquisition reform. Prior to 1989 the contract administration services (CAS) capabilities of the military services and various DoD offices varied greatly in capability, experience, and oversight effectiveness.Some of these duties had been assigned to what is now the Defense Logistics Agency (DLA), but major acquisition contracts remained with the Services.

For example, when I was on active duty as a young Navy Supply Corps Officer as part of the first class that was to be the Navy Acquisition Corps, I was taught cradle-to-grave contracting. That is, I learned to perform customer requirements development, economic analysis, contract planning, development of a negotiating position, contract negotiation, and contract administration–soup to nuts. The expense involved in developing and maintaining the skill set required of personnel to maintain such a broad-based expertise is unsustainable. For analogy, it is as if every member of a baseball club must be able to play all nine positions at the same level of expertise; it is impossible.

Furthermore, for contract administration a defense contractor would have contractual obligations for oversight in San Diego, where I was stationed, that were different from contracts awarded in Long Beach or Norfolk or any of the other locations where a contracting office was located. Furthermore, the military services, having their own organizational cultures, provided additional variations that created a plethora of unique requirements that added cost, duplication, inconsistency, and inter-organizational conflict.

This assertion is more than anecdotal. A series of studies were commissioned in the 1980s (the findings of which were subsequently affirmed) to eliminate duplication and inconsistency in the administration of contracts, particularly major acquisition programs. Thus, DCMC was first established under DLA and subsequently became its own agency. Having inherited many of the contracting field office, the agency has struggled to consolidate operations so that CAS is administered in a consistent manner across contracts. Because contract negotiation and program management still resides in the military services, there is a natural point of conflict between the services and the agency.

In my view, this conflict is a healthy one, as all power in the hands of a single individual, such as a program manager, would lead to more fraud, waste, and abuse, not less. Internal checks and balances are necessary in proper public administration, where some efficiency is sacrificed to accountability. It is not just the goal of government to “make the trains run on time”, but to perform oversight of the public’s money so that there is accountability in its expenditure, and integrity in systems and procedures. In the case of CAS, it is to ensure that what is being procured actually gets delivered in conformance to the contract terms and conditions designed to reduce the inherent risk in complex acquisition programs.

In order to do its job effectively, DCMA requires innovative digital systems to allow it to perform its CAS function. As a result, the agency must also possess an acquisition capability. Given the size of the task at hand in performing CAS on over $5 trillion of contract effort, the data involved is quite large, and the number of personnel geographically distributed. The inevitable comparisons to private industry will arise, but few companies in the world have to perform this level of oversight on such a large economic scale, which includes contracts comprising every major supplier to the U.S. Department of Defense, involving detailed knowledge of the management control systems of those companies that receive the taxpayer’s money. Thus, this is a uniquely difficult job. When one understands that in private industry the standard failure rate of IT projects is more than 70% percent, then one cannot help but be unimpressed by these findings, given the challenge.

Assessing the Findings and Recommendations

There is a reason why internal oversight documents of this sort stay confidential–it is because these are preliminary/draft findings and there are two sides to every story which may lead to revisions. In addition, reading these findings without the appropriate supporting documentation can lead one to the wrong impression and conclusions. But it is important to note that this was an internally generated investigation. The checks and balances of management oversight that should occur, did occur. But let’s take a close look at what the reports indicate so that we can draw some lessons. I also need to mention here that POGO’s conflation of the specific issues in this program as a “poster child” for cost overruns and schedule slippage displays a vast ignorance of DoD procurement systems on the part of the article’s author.

Money, Money, Money

The core issue in the findings revolves around the proper color of money, which seems to hinge on the definition of Commercial-Off-The-Shelf (COTS) software and the effort that was expended using the two main types of money that apply to the core contract: RDT&E and O&M.

Let’s take the last point first. It appears that the IWMS effort consisted of a combination of COTS and custom software. This would require acquisition, software familiarization, and development work. It appears that the CIO was essentially running a proof-of-concept to see what would work, and then incrementally transitioned to developing the solution.

What is interesting is that there is currently an initiative in the Department of Defense to do exactly what the DCMA CIO did as part of his own initiative in introducing a new technological approach to create IWMS. It is called Other Transactional Authority (OTA). The concept didn’t exist and was not authorized until the 2016 NDAA and is given specific statutory authority under 10 U.S.C. 2371b. This doesn’t excuse the actions that led to the findings, but it is interesting that the CIO, in taking an incremental approach to finding a solution, also did exactly what was recommended in the 2016 GAO report that POGO references in their article.

Furthermore, as a career Navy Supply Corps Officer, I have often gotten into esoteric discussions in contracts regarding the proper color of money. Despite the assertion of the investigation, there is a lot of room for interpretation in the DoD guidance, not to mention a stark contrast in interpreting the proper role of RDT&E and O&M in the procurement of business software solutions.

When I was on the NAVAIR staff and at OSD I ran into the difference in military service culture where what Air Force financial managers often specified for RDT&E would never be approved by Navy financial managers where, in the latter case, they specified that only O&M dollars applied, despite whether development took place. Given that there was an Air Force flavor to the internal investigation, I would be interested to know whether the opinion of the investigators in making an ADA determination would withstand objective scrutiny among a panel of government comptrollers.

I am certain that, given the differing mix of military and civil service cultures at DCMA–and the mixed colors of money that applied to the effort–that the legal review that was sought to resolve the issue. One of the principles of law is that when you rely upon legal advice to take an action that you have a defense, unless your state of mind and the corollary actions that you took indicates that you manipulated the system to obtain a result that shows that you intended to violate the law. I just do not see that here, based on what has been presented in the materials.

It is very well possible that an inadvertent ADA violation occurred by default because of an improper interpretation of the use of the monies involved. This does not rise to the level of a scandal. But going back to the confusion that I have faced from my own experiences on active duty, I certainly hope that this investigation is not used as a precedent to review all contracts under the approach of accepting a post-hoc alternative interpretation by another individual who just happens to be an inspector long after a reasonable legal determination was made, regardless of how erroneous the new expert finds the opinion. This is not an argument against accountability, but absent corruption or criminal intent, a legal finding is a valid defense and should stand as the final determination for that case.

In addition, this interpretation of RDT&E vs. O&M relies upon an interpretation of COTS. I daresay that even those who throw that term around and who are familiar with the FAR fully understand what constitutes COTS when the line between adaptability and point solutions is being blurred by new technology.

Where the criticism is very much warranted are those areas where the budget authority would have been exceeded in any event–and it is here that the ADA determination is most damning. It is one thing to disagree on the color of money that applies to different contract line items, but it is another to completely lack financial control.

Part of the reason for lack of financial control was the absence of good contracting practices and the imposition of program management.

Contracts 101

While I note that the CIO took an incremental approach to IWMS–what a prudent manager would seem to do–what was lacking was a cohesive vision and a well-informed culture of compliance to acquisition policy that would avoid even the appearance of impropriety and favoritism. Under the OTA authority that I reference above as a new aspect of acquisition reform, the successful implementation of a proof-of-concept does not guarantee the incumbent provider continued business–salient characteristics for the solution are publicized and the opportunity advertised under free and open competition.

After all, everyone has their favorite applications and, even inadvertently, an individual can act improperly because of selection bias. The procurement procedures are established to prevent abuse and favoritism. As a solution provider I have fumed quite often where a selection was made without competition based on market surveys or use of a non-mandatory GSA contract, which usually turn out to be a smokescreen for pre-selection.

There are two areas of fault on IMWS from the perspective of acquisition practice, and another in relation to program management.

These are the initial selection of Apprio, which had laid out the initial requirements and subsequently failed to have the required integration functionality, and then, the selection of Discover Technologies under a non-mandatory GSA Blanket Purchase Agreement (BPA) contract under a sole source action. Furthermore, the contract type was not appropriate to the task at hand, and the arbitrary selection of Discover precluded the agency finding a better solution more fit to its needs.

The use of the GSA BPA allowed managers, however, to essentially spit the requirements to stay below more stringent management guidelines–an obvious violation of acquisition regulation that will get you removed from your position. This leads us to what I think is the root cause of all of these clearly avoidable errors in judgment.

Program Management 101

Personnel in the agency familiar with the requirements to replace the aging procurement management system understood from the outset that the total cost would probably fall somewhere between $20M and $40M. Yet all effort was made to reduce the risk by splitting requirements and failing to apply a programmatic approach to a clearly complex undertaking.

This would have required the agency to take the steps to establish an acquisition strategy, open the requirement based on a clear performance work statement to free and open competition, and then to establish a program management office to manage the effort and to allow oversight of progress and assessment of risks in a formalized environment.

The establishment of a program management organization would have prevented the lack of financial control, and would have put in place sufficient oversight by senior management to ensure progress and achievement of organizational goals. In a word, a good deal of the decision-making was based on doing stupid things on purpose.

The Recommendations

In reviewing the recommendations of the internal investigation, I think my own personal involvement in a very similar issue from 1985 will establish a baseline for comparison.

As I indicated earlier, in the early 1980s, as a young Navy commissioned officer, I was part of the first class of what was to be the Navy Acquisition Corps, stationed at the Supply Center in San Diego, California. I had served as a contracting intern and, after extensive education through the University of Virginia Darden School of Business, the extended Federal Acquisition Regulation (FAR) courses that were given at the time at Fort Lee, Virginia, and coursework provided by other federal acquisition organizations and colleges, I attained my warrant as a contracting officer. I also worked on acquisition reform issues, some of which were eventually adopted by the Navy and DoD.

During this time NAS Miramar was the home of Top Gun. In 1984 Congressman Duncan Hunter (the elder not the currently indicted junior of the same name, though from the same San Diego district), inspired by news of $7,600 coffee maker and a $435 hammer publicized by the founders of POGO, was given documents by a disgruntled employee at the base regarding the acquisition of replacement E-2C ashtrays that had a cost of $300. He presented them to the Base Commander, which launched an investigation.

I served on the JAG investigation under the authority of the Wing Commander regarding the acquisitions and then, upon the firing of virtually the entire chain of command at NAS Miramar, which included the Wing Commander himself, became the Officer-in-Charge of Supply Center San Diego Detachment NAS Miramar. Under Navy Secretary Lehman’s direction I was charged with determining the root cause of the acquisition abuses and given 60-90 days to take immediate corrective action and clear all possible discrepancies.

I am not certain who initiated the firings of the chain of command. From talking with contemporaneous senior personnel at the time it appeared to have been instigated in a fit of pique by the sometimes volcanic Secretary of Defense Caspar Weinberger. While I am sure that Secretary Weinberger experienced some emotional release through that action, placed in perspective, his blanket firing of the chain of command, in my opinion, was poorly advised and counterproductive. It was also grossly unfair, given what my team and I found as the root cause.

First of all, the ashtray was misrepresented in the press as a $600 ashtray because during the JAG I had sent a sample ashtray to the Navy industrial activity at North Island with a request to tell me what the fabrication of one ashtray would cost and to provide the industrial production curve that would reduce the unit price to a reasonable level. The figure of $600 was to fabricate one. A “whistleblower” at North Island took this slice of information out of context and leaked it to the press. So the $300 ashtray, which was bad enough, became the $600 ashtray.

Second, the disgruntled employee who gave the files to Congressman Hunter had been laterally assigned out of her position as a contracting officer by the Supply Officer because of the very reason that the pricing of the ashtray was not reasonable, among other unsatisfactory performance measures that indicated that she was not fit to perform those duties.

Third, there was a systemic issue in the acquisition of odd parts. For some reason there was an ashtray in the cockpit of the E-2C. These aircraft were able to stay in the air an extended period of time. A pilot had actually decided to light up during a local mission and, his attention diverted, lost control of the aircraft and crashed. Secretary Lehman ordered corrective action. The corrective action taken by the squadron at NAS Miramar was to remove the ashtray from the cockpit and store them in a hangar locker.

Four, there was an issue of fraud. During inspection the spare ashtrays were removed and deposited in the scrap metal dumpster on base. The tech rep for the DoD supplier on base retrieved the ashtrays and sold them back to the government for the price to fabricate one, given that the supply system had not experienced enough demand to keep them in stock.

Fifth, back to the systemic issue. When an aircraft is to be readied for deployment there can be no holes representing missing items in the cockpit. A deploying aircraft with this condition is then grounded and a high priority “casuality report” or CASREP is generated. The CASREP was referred to purchasing which then paid $300 for each ashtray. The contracting officer, however, feeling under pressure by the high priority requisition, did not do due diligence in questioning the supplier on the cost of the ashtray. In addition, given that several aircraft deploy, there were a number of these requisitions that should have led the contracting officer to look into the matter more closely to determine price reasonableness.

Furthermore, I found that buying personnel were not properly trained, that systems and procedures were not established or enforced, that the knowledge of the FAR was spotty, and that procurements did not go through multiple stages of review to ensure compliance with acquisition law, proper documentation, and administrative procedure.

Note that in the end this “scandal” was born by a combination of systemic issues, poor decision-making, lack of training, employee discontent, and incompetence.

I successfully corrected the issues at NAS Miramar during the prescribed time set by the Secretary of the Navy, worked with the media to instill public confidence in the system, built up morale, established better customer service, reduced procurement acquisition lead times (PALT), recommended necessary disciplinary action where it seemed appropriate, particularly in relation to the problematic employee, recovered monies from the supplier, referred the fraud issues to Navy legal, and turned over duties to a new chain of command.

NAS Miramar procurement continued to do its necessary job and is still there.

What the higher chain of command did not do was to take away the procurement authority of NAS Miramar. It did not eliminate or reduce the organization. It did not close NAS Miramar.

It requires leadership and focus to take effective corrective action to not only fix a broken system, but to make it better while the corrective actions are being taken. As I outlined above, DCMA performs an essential mission. As it transitions to a data-driven approach and works to reduce redundancy and inefficiency in its systems, it will require more powerful technologies to support its CAS function, and the ability to acquire those technologies to support that function.

Family Affair — Part II — The Micro and Managerial Economics of Projects under Public Monopsony

In my last post I summarized by the macroeconomic environment in which we operate and delved into some discussion of microeconomic foundations.  The response was positive if lukewarm overall, but ego-boosting is not why I started a blog.  One of my readers once asked why I don’t take on some hot button issues.  Well that’s not my role or area of expertise.  I’m not a politician or a social commentator.  The community I inhabit has a large impact but is relatively small and mostly consists of engineers, scientists, mathematicians, some policy-makers, thought leaders, and other technically-focused professionals.  I’m not trying to stir up emotions.  I’m out to stimulate discussion and thought.  I’m relieved that I don’t get trolls when posting factual information that goes against popular misconceptions.  They are a waste of time.

So for me this blog serves two purposes.  First, it is a public discussion of sorts on topics both familiar and unfamiliar, but which I consider interesting.  I do a lot of background research for each post and usually learn something new.  That’s why I don’t post every day.  I give things some thought and research what I write about.  I think it useful to share these discoveries and insights.  The ones that relate to my professional development and expertise in software and project management get posted to my company’s website.

Secondly, I think we live in interesting times.  This is meant both positively and ironically.  I think it useful to record the human condition as we find it in our daily lives during the period of human history we inhabit, and to record many of the intellectual and cultural issues that are topical.  I always find it interesting to return to a subject years later through the writings of others as well as my own to see how they stack up against the perspective of time.  Dr. Roger Spiller of the Army’s Combat Studies Institute, one of my mentors for my graduate degree in history, once told me that if I can look back at anything I’ve written and not be embarrassed by something in those writings would make me a very lucky man.  I’m not that lucky.  But taking the chance to be wrong is part of the price of intellectual curiosity.  Recognizing and admitting one’s wrongness is part of intellectual honesty and maturity–and we are nothing if not thinking.  Our intellect is the most significant feature that we possess that distinguishes us from the other animals.  It is in the cliche’, the ideology, the spin, the doctrine–types of non-thought–where evil finds comfort.

So in continuing from my last post; in understanding the basis of the macroeconomic environment in which we operate, how these systems behave, and how the microeconomics under the macroeconomic environment are affected by the framing of the macro rules of behavior allow us to then flesh out the microeconomics and managerial economics of project management.

As I stated in my last post on the topic, markets are really good at establishing price and pretty bad mechanism for anything else.  Everyone who has taken basic economics understands the basic supply and demand curve.  Here is an example for housing*:

 

So when we make decisions for projects within an organization or firm regarding price, which then allows us to determine the resources we will have to do business given a set of assumptions on possible sales volume, it is useful to understand the nature of the market in which it inhabits, and the competitive environment of that market.  Some examples follow.

Public Monopsony

I have a great deal of experience in operating in this type of market from my perspectives as a business operator and owner and, previously, as a government Contracting Officer and acquisition professional.  Monopsony exists where there is one dominant buyer of the supplies and services from that market.  There are both public and private monopsony (and some are forced by unfair competitive practices such as exclusivity agreements by dominant market entities due to their monopolistic or oligopolistic ambitions or position in a market as sellers).

The traditional supply and demand curve does not apply in the way that classical economics recognizes it under these conditions.

In government monopsony, such as the market for items for the Department of Defense and other specialized government agencies, the chances are that only a portion of the available commercial products in the market can be adapted to the requirement.  Very few commercial products need to survive missile impacts, evade guidance and radar systems, or survive through high G escape velocities and then perform in the vacuum of space, to name only some capabilities often desired.  Oftentimes commercial technologies that can be applied must be modified or “hardened” in order survive in the expected environments.

Governmental or public monopsony power cuts both ways.  As it is practiced in the United States under republican institutions, it behaves mostly in a benevolent manner.  The companies that inhabit this space in large part would not exist and achieve profitability if not for the specialized skills and products required.  They are, for all intents and purposes, semi-public institutions.  It is the irony of our times that free market fundamentalists will simultaneously criticize this type of governmental power while acknowledging the need for the end items that are only possible under this arrangement, especially in regard to national defense, but also for any measure of infrastructural, health, and other items required by a functioning nation.

In terms of microeconomics, there are a number of mechanisms that exist to balance out the asymmetrical relationship between the parties, while at the same time certain peculiarities in which the sovereign (the government) maintains its position.  For example, in contracting, the government invites an offer.  The methods of acquisition are requests for quote, requests for proposals, requests for information, etc.  The private or semi-private entity is always the offeror and, therefore, it is assumes freely engages in the activity being contracted.  In addition, only those offerors deemed both responsible and responsive can enter into a contract.  Responsibility includes a host of technical measures but, simply, it means that the firm offering the supplies and services has both the means and ability to perform the work.

The balancing mechanisms that apply in this market are many of the same institutions that provide checks and balances in competition with the Executive Branch: the Courts and the Congress.  The press operating as the Fourth Estate also provides a check in this area.  In addition, economic organizations from industry can petition the government through both direct lobbying and lobbying organizations, and influence the development of policy and standards through membership in professional organizations where certain competencies are shared.

Thus, because of these interrelationships and the nature of the market, competition is oftentimes limited to a few firms possessing expertise that is highly specialized.  Price competition, when it does occur, is oftentimes marginal (or should be) and employs a number of strategies summarized by the phrase “priced to win.”  These strategies can result in market distortions known as “buying-in” to a contractual arrangement.  There may be compelling reasons on the part of the producer/supplier to “buy-in”–denying market share to a competitor, to protect an area of expertise or a skillset or, alternatively, to develop one;  to ensure employment of internal competencies that would otherwise drive up overhead costs due to unutilized labor, apart from the motivation to win business.  For example, on the issue unutilized labor, one can reasonably ask how much it costs to develop an engineer familiar with the airframe of, say, an F-16 and, if lost, how can this expertise ever be reacquired so as to be available when it is needed?  Thus, in government acquisition, it falls upon the Contracting Officer to weigh these issues and prevent outright buying-in, though their expertise and skill in identifying and preventing this type of behavior is certainly not uniform.

Where there is an overlap for supplies ands services across both private and public sectors, there is an opportunity for some competition among firms that provide items based on commercial-off-the-shelf-pricing that responds to a certain extent to the supply and demand pricing mechanism.  For example, in project management, these are usually firms devoted to consulting and to software companies with sharply targeted functionality.  But even here, the expertise required to fulfill some of the needs of the market are unique and, as a result, prices tend to be sticky or inelastic; resisting wholesale competition that would drive a race to the bottom based solely on price.

Furthermore, since acquisition is an Executive Branch responsibility subject to acquisition law, rules, and regulations, their interpretation and implementation is oftentimes influenced not only by operational, but also political considerations.  Since the imposition of sequestration, for example, project managers and contracting officers have been under a great deal of pressure to reduce both costs and prices.  This can often result in government agencies acquiring an inferior or deficient product–or fewer units than needed based on operational requirements–where cost and price pressure is the overriding consideration.  The tenor of looking for cost reduction has been a constant since the early 1980s.  Thus, over the years, a number of “acquisition reform” methods have been employed to counteract the perceived and real inefficiencies in acquiring the latest technology at the most reasonable cost.

Where cost and price pressure is seen to undermine quality, the supply and demand curve in setting price is modified by agencies to require that an assessment of value be determined, and that the item providing the best value, even if not the lowest cost, be selected.  Even in an expansive open market with many competitors there will be a range of similar products offered under range of prices, where the consumer will view several of the products as falling within an acceptable range of value.  This perception of value can be influenced by the asymmetrical relationship between the parties regarding information, or influenced by other psychological factors such as fashion and marketing.  Government monopsony counteracts the asymmetrical relationship of information and psychological factors that tend to distort good market decisions through specialized requirements on offerors–Truth in Negotiations (TINA), representations and certifications of full disclosure, socio-economic and non-discriminatory status, in sensitive areas restrictions on the use of foreign nationals and foreign influence, adherence to U.S. federal labor laws, among other requirements.  For highly complex cost-reimbursable efforts, the offeror must provide cost accounting data and procedures, and ensure that business systems adhere to certain minimum standards prior to award.  Contracting officers can also open discussions and negotiations at will to determine the true cost or value of the supplies and services being acquired–compelling the offeror to provide the necessary information.

Value analysis also acts as a break to downward price pressure.  For example, in my own area of software technology, while it is true that general expertise in areas of programming that 10 years ago were fairly rare–and commanded high salaries–is no longer the case due to policies that promoted globalization, there are some very highly specialized skillsets that cannot be outsourced, at least not yet.  Finding someone who understands not only how to code, but how that code needs to operate in the environment for which it is designed, is a skill that is highly influenced by culture.  The culture can be one of a nation, a people, a market, or a specialty.  In the area of public project management in the United States, it may not be sufficient for someone to come forward with general programming skills without an understanding of the managerial economics that influence the environment.  Instead, they may be called upon to know or be able to learn very quickly the security protocol required for the data being processed, the structure of the organizations in the market, and the manner in which information is consumed and analyzed, as well as issues of cost management, schedule management, risk management, and technical achievement.  Individuals with these skillsets exist but they are few and far between, and command salaries commensurate with their talents and expertise.  From the microeconomic perspective, when there is no longer a demand for this expertise the value will no longer be there to sustain the price established, but there isn’t going to be a lot of price competition while there is demand, so pricing tends to be inelastic.

In public monopsony, the government is the consumer.  As such, this differs from private monopsony such as that recently described by The New Republic regarding Amazon’s impact on the publishing industry, where the dominant market entities are part of the supply chain between producers and consumers.

The management economics of project management under public monopsony, then, leaves no room for pricing adjustments other than what is provided by the contracts that govern the acquisition of the products and services.  Where commercial products can be utilized, pricing is flexible enough in making a difference in terms of project cost reduction for those niches, assuming that they do not require a great deal of specialization or configuration to meet the special needs of the public marketplace.  This creates an environment of both certainty (and hence stability until, at least, instability is introduced by the political system) and a series of constraints on both managerial action and economic flexibility.

As such, there is no room for lack of estimating, scheduling, risk assessments, or performance management as has been pointed out numerous times, but most recently by Glen Alleman in his excellent “Herding Cats” blog.  There is no room for “exploring” because “we don’t know what we need until we build it.”  Recently I attended a meeting with both public and private industry officials discussing how Agile methods can be reconciled with the more structured environment of public project management.  Well, I guess if we forget about budgets and contracts we can all get to that day when developers don’t have to be accountable and we all can pursue imaginary cost avoidance in providing unmeasurable value under the rubric of cults built on catchphrases.  (And a sad day that would be).

In the meantime, for a firm to survive and its products to be sustainable so that it continues to win a share in this market, inelastic pricing that must be established by strong estimating skills in determining what the market entities will accept, an active regulatory regime, and a structured contracting environment–which provide both advantages and constraints–are the overriding factors in managerial economics as they apply to project management under public monopsony.

I will be dealing with private monopsony in a post next week.

*From “Comparative Statics: Changes in the Price of Housing”, section 19.2 from the book Theory and Applications of Economics (v. 1.0).  The chart can also be found here.

 

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.