Industry Hot Issues

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Industry Hot Issues

• NCMA , April 28, 2009

Eleanor Spector VP, Contracts
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Current Contracting Issues

• Award and incentive fees
• Fixed price contracts development
• Conflicts of Interest
• Ethics policy changes
• Protests
• Protectionist legislation

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Award and Incentive Fees

• GAO report (12/19/05)
• 8B in award fees paid regardless of outcomes on
  sampled programs
• Rollover on 52 of award fee contracts
• Significant amounts paid for acceptable,
  average, expected, good or satisfactory
  performance
• GAO failed to acknowledge that the outcomes are
  the best weapon systems in the world,
  notwithstanding cost, technical and schedule
  problems due to upfront uncertainty in
  development.

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Award and Incentive Fees (continued)

• OSD policy memos (3/29/06, 4/24/07)
• Tie award fees to milestones
• Rollover is the exception rather than the rule
• Urged multiple incentive contracts
• DF required to use CPAF contract
• Defined satisfactory as no greater than 50
  award fee
• Industry challenge
• Declining award fee scores

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Award and Incentive Fees (continued)

• Few companies capable of performing challenging
  DoD contracts. We are inventing the future cost
  and schedule are impossible to predict
  accurately.
• DoD must consider the impact on its contractor
  base in fee policy and implementation.
• Fee policy must ensure a strong, creative
  industrial base with assets to attract and retain
  critical skills.
• Contractors earning fair returns invest in IRD
  and capital assets.
• Contractors have seen decline in award fee scores
  for comparable performance.

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Fixed Price Development

• Pendulum is swinging back toward FP contracts for
  development and low rate production.
• Sec. 818 of FY07 NDAA (10/17/06) shifted paradigm
  from senior level approval for FP development to
  senior level approval for CR development.
• Sec. 864 of FY09 NDAA (10/14/08) requires
  revisions to the FAR to address appropriate use
  of cost-reimbursable contracts.
• President Obama (3/4/09) directed OMB to issue
  guidance on all contract types. There shall be
  a preference for FP type contracts.

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Fixed Price Development (continued)

• Cost growth on FP development contracts
  equivalent to that on cost reimbursable contracts
  and Government struggles with claims and
  terminations.
• Competition fosters technical, schedule, and cost
  optimism. Contractor proposal becomes basis for
  budget, with no cost reserves.
• FP development for major systems drove companies
  close to bankruptcy and prohibited the
  flexibility to do necessary redesign and
  retesting.
• Inappropriate use of FP contracts has never
  resulted in a successful program.

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OCI and PCI

• Section 841 of FY09 NDAA
• OFPP issue policy to prevent personal conflict of
  interest (PCI) by contractor employees performing
  acquisition functions closely associated with
  inherently government functions. For other
  contractor employees, OFPP determine if revisions
  to the FAR necessary to address PCI.
• Levin-McCain bill (introduced 2/23/09)
• Section 205 would require a contract for SETA
  functions on a major weapon system contain a
  provision prohibiting the contractor from having
  a financial interest in the development or
  construction of the weapon system.

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OCI and PCI (continued)

• SASC markup of Sec. 205 creates an exception for
  affiliates that are separated by mechanisms
  similar to those required under rules governing
  foreign ownership, control or influence over U.S.
  companies that have access to classified
  information and allows for a phase-in period
  until January 1, 2011.
• 3/4/09 Obama Memo requires OMB to clarify when
  governmental outsourcing for services is
  appropriate.
• Effective processes in place to perform OCI
  screening and mitigation. Hundreds of OCI plans
  effectively implemented.

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Ethics Policy Changes

• DoD referrals of cases for possible criminal
  prosecution were 76 lower in 2008 (86) than in
  in 2001 (213) while defense contracts doubled to
  400B in FY08.
• This is good news on the state of industry
  ethics however, now policy has been issued aimed
  at more prosecutions.

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Ethics Policy Changes

• Mandatory Disclosures
• FAR 52.203-13, issued 12/08, moves certain
  disclosures of statutory violations or
  significant overpayments from voluntary to
  mandatory
• Requires reports in writing to
• Agency OIG, and
• Contracting Officer
• Suspension and debarment for knowing failure by a
  principal to timely disclose
• Must report credible evidence of
• violations of federal criminal law involving
  fraud, conflict of interest, bribery, or
  gratuities
• violations of the Civil False Claims Act or
• significant overpayments.

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Ethics Policy Changes

• Most companies are already reporting violations
  voluntarily, though not necessarily to the IG, so
  mandatory disclosure may not have enormous
  impact.
• 3/13/09 DCAA policy on reporting actions of
  Government Officials
• DCAA will now report certain unsatisfactory
  conditions to the IG including contracting
  officer not having DCAA prepare a complete audit
  or ignoring an audit report and awarding a
  contract at excessive costs and/or profit.
• DCAA audits contractors, should not be reporting
  on its customer without going through contracting
  chain.

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Protests

• For 90 years, GAO has resolved protests.
• The number of protests is relatively small.
• Federal Government awards 6M contracts a year.
• In FY08, 1,652 awards were protested, 60 protests
  sustained.
• Protests getting considerable attention because
  large contracts have been protested with
  re-competes taking years.
• FY08 NDAA permits contractors to protest task
  orders of over 10M. Previously, protests were
  limited to assertions that the task order changed
  the scope, period, or maximum value of the
  contract. This will further increase protest
  numbers.

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Protectionist Legislation

• U.S. aerospace industry
• 97B in exports in 2007 61B surplus
• Largest surplus of any manufacturing sector
• If the U.S. imposes protectionist measures, other
  countries follow suit.
• Recovery Act includes iron, steel and
  manufactured goods protections for public works
  projects.
• Industry watches legislation closely for any new
  protectionist legislation.

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Summary

• Important activity in legislation and regulation
  that industry attempts to shape.
• Focus of new administration.

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