Section 806 of the FY2020 NDAA directs the Under Secretary of Defense for Acquisition and Sustainment to review how the Department of Defense uses fixed-price contracts.
This is a topic that comes up periodically. To the uninitiated, it would seem that a fixed-price contract will result in larger profits, but that is not always the case.
We first have to understand that while it seems that fixed-price contracts have the potential for higher profits, they also have the potential for substantial losses. Assuming that there are no changes made, you will be obligated to deliver some set of things or services or things with services, at a fixed price, and it just isn’t necessarily clear when you go into this arrangement that the arrangement will be profitable.
It is true that you’ve priced it as a contractor to be profitable, however, circumstances change and the project can be different than you anticipated. Yet you’re still obligated to deliver that same set of things or services or things with services, for that same fixed price.
For example, let’s say I’m obligated to deliver 100 people throughout the country at various locations to do some clerical work. I’m required for those workers to have a certain level of skills, and a certain type of clearance. Well, I actually might deliver fewer people for a short period of time, because some people are in transit, or some have quit and not yet been replaced, but I’m still getting paid as if all 100 workers are still in place.
That’s good for me because I’ve getting paid a fixed price for 100 people and there’s only 95 on the job. Of course this is assuming that the number of people I’m not delivering doesn’t upset the client or cause me to miss deadlines or create problems that threaten my contract.
On the risk side, let’s say we’re in a very low unemployment rate, with correspondingly upward pressure on wages and skillsets. While I’ve told my client I’d deliver those 100 people for $65,000 each, now I’ve got to pay my employees $70,000 in order to get the required level of skill and so forth. Then my current people see what the new people are making and they want more money as well. Wages are up, which is good for people in general, but as a contractor I have to pay more and can’t charge the client more because we have a fixed-price contract.
So the reason fixed-price contracts are often won with a lesser value is because the risk is higher and therefore the margin that I pitch is higher. Often we build in contingencies as well, which might mean I think I can hire at $60,000, so I pitch at $65,000. But I could still end up having have to hire some at $68,000 or $70,000 so now I’m starting to lose money on those people.
This provision brings us into the study phase. The 2020 NDAA directs the Defense Department to look at the circumstances in which fixed-price contracts are used and awarded, and the experience from the government’s perspective.
Understand that the legislators are including many different forms of contracting that include the words fixed price that aren’t necessarily completely fixed, which has muddied the waters a little bit. They’ve included cost plus fixed fee, another form of fixed-priced contracting, and fixed labor rates. This will all come out in the wash.
They set a pretty aggressive deadline of February 2020 for the Under Secretary to brief the congressional defense committees on the findings of the review. If you have any comments once the NDAA is approved, let us know and we should be able to put our oar in the water through the Mid-Tier Advocacy group.
We’ve been discussing the Office of Management and Budget (OMB)’s six proposals for streamlining the acquisition process and improving the acquisition environment, part of the FY 2020 National Defense Authorization Act (NDAA), and we’ve reached the final post in the series.
This proposal would revise 42 U.S.C. 6962(c)(3)(A), which requires certification by Federal contractors to estimate the percentage of the total recovered material content for U.S. Environmental Protection Agency (EPA)-designated item(s) delivered and/or used in contract performance, and to submit a certified report to their contracting officer.
This proposal has to do with the administration’s move to reduce “regulatory burdens.” It is part of a general overall trend, and here at TAPE we are unrelentingly in favor of reducing any kind of administrative burden. In this case there was a duplication where things had to be reported both to the EPA and to the contracting officer, who really wasn’t going to do anything about it because it’s the EPA who needs to keep track of recovered products.
For example, if you’re removing asbestos from a building, you have to report that it’s there, and how you’re going to dispose of it by taking it to the right place, getting it recycled, etc. Since that is an EPA requirement, not a FAR requirement, it makes good sense to leave it out of FAR. There’s still a burden, you still have to report it, but you only have to do it once.
Don’t we love the OMB?
Nearly 20,000 members strong, the National Contract Management Association (NCMA) is the world’s leading resource for professionals in the contract management field.
Each year NCMA holds their annual World Congress which is the nation’s premier training event for contract management, procurement, and acquisition professionals. Participants from both government and industry backgrounds gather to learn about critical issues challenging our industry.
This year’s World Congress was from 28-31 July 2019, when more than 2,500 contract management professionals from across the federal government, state and local government, private industry and education gathered in Boston, MA. This year’s theme was, “Shaping Acquisition: Modern, Adaptive, Connected.”
An engaging list of main stage speakers included Suzanne Vautrinot, president of Kilovolt Consulting Inc., who spoke about balancing risk with opportunity, as well as a Workforce Challenges panel consisting of several key acquisition leaders in the federal government. They offered their thoughts on innovative ways to make today’s workforce more flexible and nimbler and the use of enabling technologies such as AI and “workforce bots.”
Other mainstage sessions included a panel discussion on managing change and some of the emerging challenges facing government acquisition and a keynote by Stacy Cummings, Principle Deputy Assistant Secretary of Defense, Acquisition Enabler, US Dept of Defense. She emphasized the ultimate goal of DoD to modernize its acquisition process and introduced attendees to the Adaptive Acquisition Framework, a flexible acquisition process that is tailorable based on the operational need to have capability delivered.
A new innovation was the use of “Exchange Sessions,” which were informal discussions led by a moderator to focus in on a topic of interest to attendees. These exchange sessions were set in groups of 10-20 and allowed participants to share best practices and ask questions of each other regarding how to overcome a variety of acquisition challenges.
While the conference provided an opportunity to network and learn there was also an opportunity to celebrate NCMA’s 60th anniversary at the Boston Institute of Contemporary Art with live music, dinner and an extraordinary view across Boston Harbor.
TAPE LLC’s SVP and Chief Operating Officer Ted Harrison moderated a panel at this year’s event entitled, “What do the 809 Panel Recommendations Mean for Small Business?” The Section 809 Panel has made several recommendations aimed at refocusing DOD’s small business program. While many have extolled the bold recommendations that would allow the government to purchase “readily available” items more like the purchasing department in private industry, still others have sounded the clarion call to stop what some perceive as the destruction of the DOD small business programs. This panel sought to find the truth in a discussion with representatives from the 809 Panel, DOD small business, and industry.
TAPE actively supports NCMA in several ways. TAPE COO Ted Harrison is a Board Director on NCMA’s National Board and TAPE CEO Louisa Jaffe is on NCMA’s Board of Advisors and has supported NCMA for many years. As well, Ted Harrison was the event chair for the annual Government Contract Management Symposium in December 2018 in Washington, DC.
In a previous post we discussed the SBA’s proposed rule about the certification processes for women-owned small businesses (WOSBs) and economically disadvantaged women owned small businesses (EDWOSBs).
This proposed rule, posted in May 2019, also looks to make the economic disadvantage requirements for the 8(a) Business Development (BD) program consistent to the economic disadvantage requirements for women-owned firms seeking EDWOSB status. This proposed change would eliminate the distinction in the 8(a) BD program for initial entry into and continued eligibility for the program.
Under the current system, the economic disadvantage criteria for EDWOSBs are the same as the continuing eligibility criteria for the 8(a) BD program, however an entity that applies for EDWOSB and 8(a) status at the same time, might be found to be economically disadvantaged for EDWOSB purposes, but denied the eligibility for the 8(a) BD program based on not being economically disadvantaged.
The new rule looks to make economic disadvantage for the 8(a) BD program consistent to that of an entity seeking to qualify as economically disadvantaged for the EDWOSB program.
The SBA specifically asked for comments (comments were closed on July 15, 2019) on the net worth standard that would be used for the EDWOSB and 8(a) programs. A 2017-18 study that the SBA conducted supported a $375,000 adjusted net worth for initial eligibility, in comparison to the current threshold of $250,000.
The SBA considered applying a $375,000 net worth standard to both the 8(a) BD and EDWOSB programs, however the study did not take into consideration differences in economic disadvantage between businesses applying to the 8(a) BD program and those continuing in the program once admitted.
The new rule proposes to use the $750,000 net worth continuing eligibility standard for all economic disadvantage determinations in the 8(a) BD program.
SBA specifically requested comments on whether the $375,000 net worth standard or the $750,000 net worth standard should be used for the 8(a) BD and EDWOSB programs, as well as how the different standards would affect small business owners participating in the federal marketplace.
The main goal of the U.S. Small Business Administration’s (SBA) proposed rule (May 14, 2019) to amend regulations on the Women-Owned Small Business program is to put in place a statutory requirement to certify women-owned small businesses (WOSBs) and economically disadvantaged women owned small businesses (EDWOSBs), which can make them eligible for set-aside and sole source awards.
This proposed rule would allow an entity to be eligible to receive awards under the Women-Owned Small Business program, as long as its application is pending.
If that entity were to be selected for the award, its application would be prioritized by the SBA, which would lead to a determination within 15 days. The SBA would provide a free electronic application process to the entities looking to get WOSB and EDWOSB certified.
The provision also acknowledges that SBA may have difficulty processing all the potential applications in a timely manner, as there are approximately 10,000 firms currently in the WOSB repository.
The anticipated increase of applications from firms could possibly overwhelm the SBA, which typically processes around 3,000 applications per year for 8(a) status, and about 1,500 a year for HUBZone status.
The SBA asked for comments on possible solutions to avoid the potential bottleneck. Comments were accepted until July 2019 and they received more than 300 comments.
It’s important to note that if or when the rule is finalized, the certification requirement will apply only to those entities that wish to compete for set-aside or sole source contracts under the WOSB Contract program.
WOSBs that are not certified will not be eligible to compete on set asides for the program. However, women-owned small businesses that do not participate in the program may continue to self-certify their status, receive contract awards outside the program as WOSBs, and count toward an agency’s goal for awards to WOSBs.
Contracting officers would be able to accept self-certifications without verification for subcontracts, full-and-open awards, and small business set-asides.
The SBA believes that the proposed rule will bolster the number of federal contract awards to WOSB and EDWOSB-certified businesses, as well as better help agencies reach the 5% federal contracting goal for women-owned small businesses.
Under the current system, contracting officers must review a contract awardee’s documentation to verify an applicant’s WOSB and EDWOSB eligibility.
From the SBA press release: “By establishing a transparent, centralized, and free certification process, the SBA aims to provide contracting officers with reassurance that firms participating in the WOSB program are eligible for awards and encourage them to set aside contracts for women-owned small businesses.”
This proposal seeks to standardize the task and delivery order protest dollar threshold for defense and civilian agencies by raising the civilian agency threshold from $10 million to equal the defense agency threshold at $25 million.
So while this is a straightforward action, it does have extensive implications. Currently, the task and delivery order protest threshold are those things that apply to multiple-award IDIQ-type contracts.
Let’s say, for example, you’re on a contract vehicle like GSA Aliant and you lose a task order. Currently, you can only lodge a protest if the dollar value of the contract exceeds $10 million, however the same situation on the defense side has a threshold of $25 million before you can protest.
If this OMB proposal goes into effect, then everyone would be subject to the higher $25 million limit, below which a protest would not be allowed on task and delivery order contracts.
This will have the effect of reducing the number and likelihood of protests in the civil sector. Things that were formally protestable between $10 million and $25 million will no longer be protestable.
From the government’s standpoint, it is certainly sensible for both sides to have the same rules. By taking on the larger standard, however, it will reduce the protestasbility of a large number of task orders. This is likely to be more of a problem for small businesses then for large businesses.
The government is attempting to streamline and reduce the activities that are different between civil and defense section and in the long run, and that’s a good thing. On the other hand, the reason the rules are different is there is less money in the civil sector and the jobs are smaller in size, and that’s the way it’s always been. Ultimately this is not good news for the small businesses who now cannot protest.
This proposal seeks to bring uniformity to procurement thresholds following the increase of the micro-purchase threshold from $3,000 to $10,000 in the NDAA for FY 2018.
A procurement threshold is the lowest level at which you can award a contract as a sole source to one particular company rather than opening it up for competition. This applies when a job is so small that trying to find enough companies to compete for the work would be too costly for the government.
So this new proposal increases that threshold to also apply to multiple-award contracts, not just single. What this means is if I, as a federal contractor, already have a multiple award IDIQ contract with a government agency, they can issue these micro-purchase orders without competition, as long as they do not exceed $10,000 in value. This makes it more fair to all contractors whether they’re in single or multiple award contracts.
There’s always a risk that the contracting officers will break the jobs up into smaller increments, particularly in DoD where the micro-threshold level is higher. That we will see only with practice, as it were.
At TAPE we’re always interested in more opportunities for sole sourcing, because that allows a customer relationship to flourish. Hopefully this proposal will have that effect.
We’ve been discussing the Office of Management and Budget (OMB)’s six proposals for streamlining the acquisition process and improving the acquisition environment, intended to be included in the FY 2020 National Defense Authorization Act (NDAA).
Proposal 3 is about uniformity in procurement thresholds. So right now purchases starting at $2 million must adhere to cost accounting standards (CAS), but complete coverage doesn’t start until you’re at $50 million. This change will eliminate these wide differences by raising the basic threshold to $15 million.
That means you will only need to start paying attention to CAS at $15 million, and full coverage still starts at $50 million. The reason for this change is that there were already some exemptions established at various other threshold levels that caused confusion about when the basic CAS really apply.
The reason this is important for us as small businesses is that full CAS coverage is very comprehensive and has a lot of details, and it’s really hard for a small business to manage this. That’s why you don’t hit full CAS coverage until $50 million. At that point you presumably have the infrastructure in place to handle the extra requirements.
One other legalistic thing being done is that they’re decoupling the CAS thresholds from the similar thresholds in what’s called the TINA (Truth in Negotiations Act), because there’s some concern that by putting them together, issues and problems come up in both.
Gosh, it seems like yesterday that the Mid-Tier Advocacy group held their Business Focused Breakfast around the legislative update with some regulatory issues thrown in (but it’s already almost time for the next one).
Our speaker on July 30th was Pam Mazza of Piliero Mazza – true experts in this legal and regulatory thicket we all have to plow through as GovCons…
We talked about the new Small Business Runway Extension Act, passed in December 2018. It turns out that the legislation had some flaws in it, so instead of new regulations flying for the 5-year average replacing the old 3-year average, they’re working on some adjustments.
It was somewhat over my head, to be sure, but it hinges on whether SBA was actually authorized, and Administrator vs. Administration. OK, I’m not kidding. However, it did pass bi-partisanly, so these changes should get made fairly quickly. Of course some places are implementing it, and I can hear the protests rumbling. My advice is to ask the question, do not assume.
Second was the SBA’s preliminary rule on inflationary adjustments to the size standards. By the way, a 10% rise from 27.5 million is going to 30 million, not to 30.25 million, because I guess bureaucrats like round numbers. These adjustments will take effect in August, but then you’ll have to be sure SAM Reps and Certs catches up, so things might take a while for these changes to actually change your size status. FYI, this is NOT the “re-evaluation” of Sector 54 and 236 still to come, someday…
There’s a bipartisan bill circulating to extend 8a sole sourcing to SDVOSB, HubZone, and WOSB/EDWOSB, and to raise the thresholds – these have not been adjusted in decades. The thicket of rule-of-2 rules and regulations for non-8a sole sourcing has got to be made easier, so we’ll see if this gains traction.
DoD issued a class deviation letter, allowing similarly situated entities on all DoD contracts.
DoD also issued a letter limiting LPTA contract evaluation types, but beware of “fake best value” where they have fewer factors and call it best value when price is really the issue.
Finally, SBA is looking at working some early termination graduation for 8a’s – more will be revealed.
And that’s the news report… These breakfasts are often a good place to hear and discuss the real issues, so if you can, attend them in your area wherever that may be. The next Mid-Tier Advocacy Business Focused Breakfast is on Tuesday, August 27th at the Tower Club in Vienna, VA, featuring SBA Associate Administrator Mr. Robb Wong. Learn more and get your tickets now.
The Office of Management and Budget (OMB) has proposed six ways to help streamline the acquisition process and improve the acquisition environment, intended to be included in the FY 2020 National Defense Authorization Act (NDAA).
The second proposal is to do away with the Defense Cost Accounting Standard Board (CASB). The issue here is that there is a Defense CASB, and there’s a federal one as well. The result is, unfortunately, is that the two different sets of cost accounting standards created can often be, well, different. So what this OMB initiative is going to try and do is eliminate the Defense CASB and consolidate everything into this one place under the federal board.
Of course, not everyone is going to be happy about this. There will be differences between the standards, and things from the Defense CASB that somebody’s been taking advantage of and doesn’t want to give up, or conversely, anything changed from the Federal CASB will have proponents and systems that cater to that function. We’ll have to figure out what those things are. Reconciling these two will be a nightmare, but it’s always better to have one rather than two things carrying out the same function.
And don’t forget that there are computer systems that handle acquisition and contract issues and cost accounting, and those will need to be adjusted.
What this demonstrates is that nothing in contracting and acquisition is ever as simple as “just do this.” So much of our regulated activity gets caught up in the very regulations being implemented; it’s never simple to change.
But, we’ll keep working on it…