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Monday, December 1, 2014

Saturday, November 1, 2014

THE TRUTH IN NEGOTIATIONS ACT (TINA)




MANAGING THE RISKS ASSOCIATED WITH DEFECTIVE PRICING 

INTRODUCTION:
 
We have previously discussed at this site the development of credible cost and pricing data. That data is the product of not only estimating and pricing but also job cost accounting for managing contracts, business system design to meet Cost Accounting Standards (CAS) and the integrated aspects of the company business system demonstrating regulatory compliance:

The purpose of this article is to cite the specifics of the “Truth in Negotiations Act” and recommend  management techniques to comply  with this law and avoid defective pricing claims by the US Government. 

THE TRUTH IN NEGOTIATIONS ACT (TINA)

Public Law 87-653 (codified by 10 USC 2306a) was originally enacted in 1962 to place the Government on equal footing with the contractor during contract negotiations.  The following are the principal features of the law:
  • Defines requirements for obtaining cost or pricing data
  •  Requires certification that data are current, accurate, and complete
  • Delineates exceptions to the requirement
  • Addresses data submission for pricing of commercial items, below threshold contracts, and “other information”
  •  Provides right of Government to examine contractor records
  • Defines cost or pricing data
  • Provides rules governing defective pricing
  • Downward Contract price adjustment
  • ·Recovery of overpayment (cost & profit) & interest (as of 1985)
  • 700K Threshold for contract actions
  • Contract actions include contracts, subcontracts, and modifications
  •  TINA applicability is not affected by contract type
  •   For subcontracts, the $700k threshold applies to the submission of data from the subcontractor to the prime contractor.
Below is an excellent presentation on further details of TINA by the National Contracts Management Association:
 
FIVE POINTS THE GOVERNMENT UTILIZES FOR ESTABLISHING DEFECTIVE PRICING
 
1)    The information in question fits the definition of cost or pricing data.

(2)    Accurate, complete, and current data existed and were reasonably available to the contractor before the agreement on price.

(3)    Accurate, complete, and current data were not submitted or disclosed to the contracting officer or one of the authorized representatives of the contracting officer and these individuals did not have actual knowledge of such data or its significance to the proposal.

(4)    The Government relied on the defective data in negotiating with the contractor.

(5)    The Government’s reliance on the defective data caused an increase in the contract price.

MANAGING THE RISK OF A DEFECTIVE PRICING CLAIM
 
A government auditor relates to TINA and defective pricing whether or not it is required contractually and uses the TINA provisions as a frame of reference in how he or she views trend analysis of your company. Even if you do not have the TINA requirement in your bid or your contract, be aware the auditor is forming his or her opinion of your compliance with the law against the TINA framework.

Post award audits can be ordered at any time by a PCO. During such audits your proposal is juxtaposed to your incurred cost and historical data on a given contract. During such juxtapositions, defective pricing stands out glaringly.  If you become aware of an anomaly, cover your tracks by immediately assessing the impact and deciding whether or not a disclosure should be made.  

Integrate your system from pricing to billing to close out utilizing a consistent cost structure template and be aware you are putting audit history in place and that historical trends are what auditors follow.
 
Keep all subsequent disclosures under proposals to the government well documented, serialized and current at the prime and subcontract level, reflecting them in a detail record of negotiation.  

If you have commenced work prior to final negotiations under a letter contract or similar interim arrangement, conduct a sweep of actual costs and commitments and reflect them in an updated proposal to the government prior to negotiation of a final price.  Reassess quotes, escalation factors, indirect costs and related factors in the same manner if a proposal expires and you are asked to extend your pricing. 

If substantive conditions in an open proposal estimate change, document them thoroughly and disclose them to the government based on an astute analysis of your risk if they can be misconstrued as defective pricing by an auditor.  Carefully convey the impact on the prospective contract and its pricing to the contracting officer if you decide to disclose. 

Consistency with CAS and your CAS disclosure statement as well as your latest negotiated forward pricing rates is mandatory. Any departure from these baselines will attract audit attention.
In many defective pricing instances what you knew and when you knew it becomes a factor.  Continually assess changing conditions that may dramatically impact your cost performance and manage them by taking corrective actions, developing workarounds and carefully communicating requirements to your subcontractors and suppliers. 

Remember under TINA you are required to perform cost/price analysis of your subcontractors if their work scope exceeds the $700k threshold. You must submit the results with your proposal to the government.  If a disclosure becomes necessary, make it sooner rather than later when the data may be under the cloud of a negative audit finding.

SUMMARY
 
Defective pricing actions by the government can have a severe impact on your past performance rating.  They must be cited by you with any new business proposal in which you are asked if your company has been accused or convicted of a violation of the law or has open or pending government adjudications regarding legal violations. 

For examples of TINA violations please see the “Federal Contractor Misconduct Data Base”, maintained by the Project on Government Oversight:

Sculpt and educate your auditor, contracting officers and government analysts on the specifics of your company business system and preserve its integrity over the long run to maximize your win potential and lower the risk of defective pricing claims by the government. 

A good rule of thumb is to consider every proposal as if it were under TINA compliance whether or not you must submit a “Certificate of Current Cost and Pricing” under TINA.  This will keep your business system sharp, your ethics and standards high and your past performance record clean.

 

Wednesday, October 1, 2014

Making an Astute Bid/No Bid Decision



 
Image: "Complex2clear"

INTRODUCTION:
Government contract proposal preparation is time consuming and can be costly. Meeting the agency Request for Proposal (RFP) requirements with a responsive proposal can be well worth the effort if a winning strategy can be formulated. When considering submitting a proposal to a given government solicitation, conduct a bid/no bid exercise. By going through that process you will begin formulating your win strategy or you will discover that you should not bid this job for lack of such a strategy. The elements of the process are discussed below in the form of questions to ask yourself against topics for key consideration.  Affirmative or non-affirmative answers to the topical questions and ability to fill in the blanks below will drive your decision to bid or not bid a solicitation.

A. Customer:
Do you know this customer? Yes __ No ___
Does this customer know you? Yes___No ___
Do you have any idea of the available funding for which the customer has obtained authorization? Yes___No ____
Specify the marketing contacts which have been made with the customer thus far:
Date:
Contact:

B. Supplies and Services:
Specify the supplies and services to be delivered in the prospective contract:

Line Item (s):


Description:

Are supplies and services in the RFP Statement of work a good match for what the company sells? Yes ___No ___
Is the RFP Statement of Work specific enough to identify risks? Yes____No ____
Is the RFP schedule specific enough to determine the delivery requirements? Yes____No____
Can the delivery schedule in the RFP be met? Yes ___No _____
Specify the delivery schedule for the prospective contract:

Line Item:


Delivery Date:

C. Contract Type/Value/Start/End Date:
Does the proposed contract type (FFP, CP, T&M, etc) suit the nature of the work? Yes___ No ___
Specify the contract type for this program: _______________.
Are there any unusual terms and conditions specified in the government RFP? Yes ____No___
Specify any unusual terms and conditions: ___________________________________________

What is the Rough Order of Magnitude (ROM) value of the prospective contract? $___________.
What is the anticipated start date of the contract? ________.
What is the anticipated end date of the contract? ________.

D. Company Strengths: 

Is this prospective contract for effort in which the company has strong skills? Yes____No ____
Specify the strengths the company will utilize in meeting the product specification or statement of work:

E. Company Weaknesses:

Are there any company weaknesses in meeting the product specification or statement of work? Yes ___No ___
Specify any weaknesses for which the company must compensate and manage associated risks:

F. Teaming Arrangements (If any):
Does company plan to team with other companies in the performance of the prospective contract? Yes ___No ___
Identify the other team member companies:

Will your company be a prime or a subcontractor? Prime___Subcontractor ____
Have NDA's and Teaming Agreements been executed? Yes____No ______

G. Competition:
Is this a sole source set-aside procurement to your company? Yes____No____
If this is a competitive procurement, identify the prospective competition and their associated strengths/weaknesses:

H. Win Strategy:
Identify the proposal features and themes which will be utilized in the proposal as discriminators to win this program:

Management:

Technical:

Cost:

I
. Proposal Budget:
Estimate the man hours and dollars for proposal labor, any travel expenses, shipping, packaging, samples and other expenses associated with preparing the proposal. The government does not reimburse the contractor for proposal preparation under the subsequent contract. Proposal expenses must be included in the cost center overhead or G&A and accounted for as marketing expense allocated across the cost center or the company.

Labor Hours __
Labor Dollars $______
Material _______
Travel _______
Reproduction _______
Samples (if any) _______
Packaging/Binding/Ship _______
TOTAL $_______

J. Analysis: 

If you can answer "YES" to at least 5 of the questions under paragraphs A through D above, it is likely you should bid this procurement.


If the answers to 7 of the 10 "YES" or "NO" questions under paragraphs A through D above are "NO" it is unlikely you should bid this procurement unless the answer to G is "YES". Even then, examine your answers and carefully review whether this business is suitable for your company. 

If the answer to E is "YES", it is unlikely you will bid this procurement successfully unless the answer to G is "YES". Even then, determine how you will overcome the weaknesses you have identified in your company associated with doing this work before you decide to bid it. 

Carefully compare the competitive analysis under Item G to the win statagy under H before you make your final decision.

K. Decision: 

BID _____


No Bid _______


Sunday, September 14, 2014

A Continuing Small Business Success Story


Congratulations to Payal, Ashish and the VSolvIT team on their recent contract awards. They are one of my longest running and most successful clients.



"BLOOMBERG BUSINESS WEEK"
VSolvit LLC Wins $19.29 Million Federal Contract

VSolvit LLC, Ventura, California, has won a $19,289,983 federal contract from the U.S. Department of Agriculture's Farm Service Agency for software technical support services for the FSA mission areas of Budget and Finance, Geospatial Service Oriented Architecture services, Common Information Technology Solutions and Administrative and Executive Management Solutions. Place of performance will be in Kansas City, Missouri.

VSolvit LLC Wins $2.38 Federal Contract

VSolvit LLC announced that it has won a $2,383,881 federal contract from the U.S. Naval Supply Systems Command, Norfolk, Virginia, for technical support services for the Afloat Logistics Program.


VSolvIT, LLC Wins $10.53 Million Federal Contract


VSolvIT, LLC was awarded a $10,527,041 federal contract by the U.S. Naval Facilities Engineering and Expeditionary Warfare Center, Port Hueneme, Calif., for information technology enterprise business systems support at Naval Facilities Information Technology Center. Place of performance will be in Ventura County, Calif."





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Monday, September 1, 2014

Fixed Price Versus Cost Plus in Federal Government Contracting

                                                         Image: Available Data dot com

Below is an interesting conversation with a very astute, anonymous interviewer on Quora recently.  It is replicated here for those who may be confused at times with regard to some of the nuances between fixed price and cost plus federal government contracting

Anonymous:

Why are cost-plus-fee government contracts less profitable for defense companies than fixed cost contracts?
 

They are extremely low risk because the contractor is guaranteed reimbursement of any and all costs up to the funded ceiling on the contract.

Therefore under the guidelines for negotiation of profit based on risk, the profit range is always settled at a lower range than other types of contracts with higher risk factors. 



Anonymous:

Thank you Ken. Is the government moving more towards cost-plus contracts and away from fixed cost contracts?

 
It depends on the type of effort involved.  Cost plus is generally in very advanced development arena, where the state of the art is being pressed, the requirements are nebulous and the design baseline is tough.

Higher profit production programs where the product or service is mature, predictable and repetitive are usually the recipients of firm fixed price contracts at higher profits.

All the huge billions for services in the war zone to companies like Brown and Root for instance are cost plus due to the unknown nature of warfare.  A similar program stateside at an air force base would lock them into fixed rates for several years but at a higher profit. 

Cost type contracts are generally pursued for cash flow, "Keep the lights on and bill every month" reasons, while the higher profit programs are being pursued at the same time in the company for their ultimate volume.

Anonymous:

What about small UAVs / drones? Are those now mostly cost plus contracts?

 
During development the more complex ones are indeed.  Size in the services and the intelligence community does not necessarily equate to simplicity with micro technology, satcom and sensors involved.

When they hit production on a repetitive basis they move to more fixed price oriented and incentive oriented higher profit contract types, which of course is the real goal of the companies involved.

Anonymous:

I'm confused, I thought cost plus was for more established technology product and fixed price was for more complex technology product (because it allowed for higher returns)?

 
It is just the opposite.

Companies like Lockheed Martin will not undertake advanced technology like the F-35 without a cost plus contract because of the risk in pressing the state of the art and meeting an enormously difficult specification.  A prototype is a one of a kind item. 

A production program is potentially in the hundreds and yields less risk at a higher profit rate overall at fixed prices.

Pentagon history is replete with incidents where companies went broke on new product development on a fixed price basis. At one point the FAR disallowed fixed price product development because of that issue.

The Lockheed Skunk works went broke years ago and had to be bailed out.  The Pentagon simply plussed up their cost plus contracts and the Black Bird was the result.

The F-35 cost plus contract was finally capped by the Air Force recently and a portion of the risk shifted to Lockheed due abuse of the cost plus contracting by Lockheed Martin.

https://www.quora.com/Ken-Larson/Posts/Plane-that-Ate-The-Pentagon-The-Politically-Engineered-F-35

Companies seek a production program follow-on at a high volume and fixed prices with higher profit with lower risk to ultimately make the real bucks,  Under such an arrangement they also own the tooling.  Uncle Sam owns the tooling on a cost plus contract.

Anonymous:
 
Hi, I'm still confused.  A company I know had high gross margins because they had more fixed price business in the last two years. For this year, they will have more cost plus and are guiding to lower margins. I thought they and more cost plus this year because they are doing more retrofitting as opposed to the original technology? I am ultimately trying to understand if this is a permanent shift in their Department of Defense business... but any clarification would help!

 
It is not surprising that gross margins go down when the cost plus base increases.  I have never seen it any other way in my 40 years in the aerospace industry.  Cost plus is low risk and low profit. 

In fact, on certain cost plus contracts there is a regulated maximum ceiling on profit not to exceed 7%.

At the bottom line there is no shift in what you are observing.  It is simply the mix of business in the company driving a lower profit rate due to the low risk, hence lower profit, nature of the cost plus environment. 

If the mix were to change to a higher base of fixed price contracts (and higher risk) the opposite trend would occur.

Anonymous:
 
Is there a reason why for the last three years they had more fixed contracts but now over a sudden the mix shifts to cost plus? Does that make sense?   So to understand - this can change every year? Is there any way to predict it based on the types of products they have going forward? Is it because they are retrofitting that its cost plus and not fixed?

 
Cost plus = high tech, high risk, difficult to meet the spec, full of unknowns and a specification that is moving around all the time until the product is base lined.

Fixed Price = mature product, prototyped and tested, probably through low rate initial production and now going high quantity for fielding.  Lower risk, company willing to commit to FFP; government comfortable the company will not go broke in doing so at a fixed price.

Rule of thumb - look at your product or service complexity and technical challenge  mix, not a government trend.

Check the above mix in the company, the mix in the market, the mix in the competition, the mix in the environment the product or service will  encounter.   Then assume cost plus for high risk, pressing the state of the art procurements and fixed price for lower risk mature products or experienced services.

Anonymous:
 
Can a program start off as fixed price and then become cost plus? Or is it the opposite?
  
 
The opposite. A program generally moves from cost plus to fixed price as it matures.

The federal government generally recognizes 6 principal categories of  acquisitions. Below is an extract from the FAR for each.

It is possible  for a product to go through, or be supported by, all 6 acquisition  categories during its life cycle and many different contact types, depending on the nature of the work, the risk and the product.