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Welcome to Apogee Consulting, Inc.

On the Road Again

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We beg your continued indulgence for the lack of productivity. To be clear: we are being productive; you just can’t tell from the output of blog articles.

I finished the 6-week SDSU class but had to make an unexpected two-day trip to a place for a business-related thing. Plus, while I have finished editing the CAS book, I still need to finish editing the FAR book. I have to hurry on the second book because I won’t be in the U.S. for the last week that Lexis/Nexis has given me for the editing schedule. (I’ll be in Germany doing another business-related thing.) And when I get back, I have to go to San Francisco for still another business-related thing (arbitration hearing). So, yeah. Kinda busy over here right now.

Here’s some content to (hopefully) tide you over:

Without going into too much detail, it’s becoming clear that DCAA is getting serious about performing more contractor business system audits. We continue to doubt that they will perform as many as they have promised; however, we’re pretty sure they will be performing more than they have in recent years (which is a grand total of “very few”).

The point is: you should talk to your DCAA folks and see what their plans are with respect to your business systems. It would be a shame to have DCAA show up unexpectedly, leaving you feeling unprepared. The consequences of that situation could be … unfortunate.

More to come when time permits….

 

UPDATE: The FAR book is done & turned into the publisher.

Last Updated on Tuesday, 07 May 2019 20:55
 

The SOX Generation

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I was having lunch with a colleague recently, and we both lamented the difficulties in finding new talent for our government accounting/compliance teams. He has had an opening for months but been unable to fill it. I don’t have any openings at the moment, but I have had my difficulties in the past finding the right person with the right mix of training, skills, and experience.

Historically, trained and experienced talent comes from DCAA. Give me an auditor with 3 – 5 years’ experience who has become frustrated with the agency, and that’s somebody I want to talk to. Another source for talent has been the Big 4 accounting firms. As I’ve written in the past, those Big 4 firms (and the next tier below them) are great places for young graduates to get prodigious amounts of training and experience. At some point, though, it becomes apparent that you are on partner track … or not. If not, it’s probably time to jump off the train and land at a corporate job—in which case, I want to talk to that person.

But as my colleague and I chatted, it became apparent that the way things are now is not the way things used to be. The talent that is coming from DCAA and the Big 4 doesn’t have the same level of training and experience that we have come to expect. My colleague asserted that we are now dealing with “the SOX generation.”

What does that mean?

Well, in 2002 the Sarbanes-Oxley Act was passed in response to several recent scandals involving corporate financial reporting. Section 302 of that Act requires the principal executive and financial officers of a public company to certify in their company's annual and quarterly reports that the reports are accurate and complete, and that the executive and financial officers have established and maintained adequate internal controls for public disclosure. Section 404 of the Act requires that company financial statements contain an assessment of the effectiveness of those internal controls and procedures. Section 404 also requires that the financial statement auditors attest to and report on their assessment of the effectiveness of the internal control structure and procedures for financial reporting.

Since then—nearly 17 years ago—auditors have focused on evaluations of companies’ internal controls. That is obviously not the only audit procedures that are performed, but it’s become one of the major concerns. And it’s not just financial statement auditors. For years, DCAA has been inching towards a SOX-based approach to business system and other audits. For example, in its FY 2015 report to Congress, DCAA stated—

DCAA has been working with an industry volunteer to explore how DCAA might leverage the information that contractors already prepare for Sarbanes-Oxley (SOX) corporate financial statement audits. Contractors assert that there is considerable duplication of audit effort between financial statement auditors, corporate internal auditors, and contract cost auditors, and we began this pilot to investigate how information prepared for SOX audits could be leveraged for DCAA business system audits. DCAA and Industry agree that SOX will not replace a DCAA audit, but both are committed to exploring actionable measures that can increase efficiencies.

In addition, the Section 809 Panel recommended that the 18 DFARS adequacy criteria associated with an accounting system be scrapped and replaced with “an internal control audit to assess the adequacy of contractors’ accounting systems based on seven system criteria.” (Recommendation 72) The Panel wrote—

An internal control audit framework based on a body of professional standards developed to address SOX 404(b) serves as a foundation to help meet the government’s objectives to obtain assurance that contractors have effective internal controls for their business systems. Starting with this framework eliminates the need to develop uniquely defined criteria and terminology, which in turn reduces the time needed to make this framework operational. … Internal control audits should be performed as the basis for assessing the adequacy of defense contractors’ accounting systems because these audits provide the following:


  • ·An engagement framework used in the private sector that is well established and understood.
  • ·More useful and relevant information to the acquisition team, contracting officer, and contractor.
  • ·Clear and objective criteria for accounting system requirements.

Thus, a focus on internal controls rather than (or in addition to, if you prefer) transaction testing has emerged. Auditors know quite a bit about controls and control activities and control objectives. They are experts in the “walk-through” of process steps. They know how to identify artifacts that document controls were exercised. They know how to determine control effectiveness. The other stuff? Not so much.

Auditors entering the aerospace/defense or general government contracting world from DCAA and/or the Big 4 seem to lack the same detailed knowledge of FAR and CAS that they used to exhibit after just a few years of experience. (Yes, I know that’s a generalization. I wasn’t talking about you; you are an exception.) As a result, senior people (such as my colleague and me) need to do more coaching and development than we used to. Or at least it seems that way.

Are you a part of the SOX generation? If so, do you want to escape? Here are some thoughts on breaking out of the trap associated with a sole expertise in internal controls.

First, read. There are a number of good books that talk about CAS and FAR. I’m not talking about the actual regulations themselves. I’m talking about commentary on the regulations. Find a book and read about judicial decisions that interpret the regulations. It used to be that the DCAA Contract Audit Manual was an important book to read. At least it gave you one point of view in solid detail. However, in recent years the CAM has been eviscerated. What’s left is still useful; but it’s not the comprehensive guide that it used to be. So find other guides.

Second, network. Find an industry association or professional seminar, and go attend. While there, make it a point to meet people and get to know them. Solidify your relationship by reaching out via LinkedIn. For those in government service who have difficulty in attending an industry meeting, you can use NCMA or AGA (and there are other groups) for the same purpose. Attend your local AGA meeting and follow the same steps discussed previously. You’ll be surprised by who you connect with.

Finally, don’t be satisfied with simply doing your job. Seek to understand why you are doing your job. Aim for the big picture. Seek the theory. If you are a DCAA auditor, don’t just execute the audit program you’ve been given; seek to understand how the audit steps integrate with the applicable CAS or FAR requirements. If you are in an audit firm, work hard to break out of the SOX work and into other firm engagements. Talk to your senior or manager or partner about what’s next for you, now that you’ve mastered SOX work. If your management team is anything like my management team (from a decade ago), I think you’ll be pleasantly surprised by how your conversation is received.

The bottom-line: don’t be part of the SOX generation. Auditors with internal control expertise are valuable, to be sure. But auditors with that expertise plus other skills are much more valuable to companies, regardless of industry.

 

Compensation Audits

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A reader who wishes to remain anonymous brought to our attention a recent DOD Office of Inspector General audit report addressing DCMA contracting officer sustention of DCAA audit findings regarding contractor executive compensation. The audit report’s findings lead us to suspect that contracting officers are going to be more reluctant to disagree with future DCAA audit findings in that area.

But before we address the DoD OIG audit report’s findings in detail, let’s discuss audit sustention rates. To be clear, we’ve discussed the topic before; in fact, a January 2019 article was devoted exclusively to the topic. In that article we wrote “The CQ sustention rate is a real indicator of audit quality. It tells us the percentage of time that a contracting officer is persuaded by an audit finding. It tells us the percentage of time that a contractor is unsuccessful at persuading a contracting officer that a DCAA audit finding is wrong. It is as close to a definition of ‘win’ or ‘lose’ as we have.”

We noted in that article that the GFY 2017 audit sustention rate was 29%. The GFY 2018 audit sustention rate was a bit higher—roughly 31% of costs questioned. In either case, though, not stellar. Less than one-third of all DCAA questioned costs are being sustained.

The pressure to increase sustention rates is noticeable. We see it in contracting officer negotiations. And now we are seeing it in DoD OIG audit reports. The latest OIG audit report blames DCMA contracting officers for failing to sustain DCAA audit findings—even though those same contracting officers are charged with using independent business judgment to resolve issues before they become litigable disputes.

Let’s look at that DoD OIG audit report in light of the context we’ve (hopefully) established. The OIG found fault with DCMA contracting officers that failed to sustain DCAA findings that contractor executive compensation was unreasonable in 18 of 35 situations reviewed. The 18 contracting officers with whom the OIG auditors disagreed failed to sustain DCAA’s audit findings for several reasons, including:

  • CO found that DCAA’s use of a 10% Range of Reasonableness (RoR) factor was invalid, relying on two ASBCA cases (J.F. Taylor and Metron).
  • CO found that the questioned compensation was reasonable when adjusted for locality pay.
  • CO found that the questioned compensation was reasonable when the executives were grouped into one single job class, rather than being evaluated on an individual basis.
  • CO found that the questioned compensation was (largely) reasonable when the contractor provided additional information showing that DCAA’s audit findings were factually incorrect.

The OIG audit report criticized the DCMA contracting officers who disagreed with DCAA’s findings. Let’s focus on one specific area of contention: the use of a 10% RoR to determine the reasonableness of executive compensation.

When a contractor executive’s compensation exceeds what a benchmark survey indicates should be the mid-point, DCAA adds 10% to the mid-point before questioning any costs. In other words, DCAA's position is that contractors should never pay their executives more than 10% higher than the survey mid-point for the position, because that would be unreasonable. The DoD OIG audit report treated that approach as if it were a feature instead of a bug, stating “DCAA adds a 10 percent RoR factor to help identify and question only claimed executive compensation that significantly exceeds the survey average. DCAA would actually question a larger amount of compensation as unreasonable if it did not add the RoR factor to the survey average.”

DCAA’s overly rigid approach was rejected by the ASBCA twice. But the OIG ignored those relatively recent ASBCA cases and, instead, inaptly focused on an older ASBCA case (Techplan). In J.F. Taylor, the Board found nine separate errors in DCAA’s methodology, including—

  • Ignored data dispersion/Use of arbitrary ‘range of reasonableness’ allowance
  • Ignored differences in survey sizes
  • Inconsistent reliance on surveys
  • Inconsistent use of 50% percentile vs. mean

The Board concluded that DCAA’s methodology was “fatally flawed statistically and therefore unreasonable.”

In Metron, the Board rejected nearly every aspect of DCAA’s compensation comparison methodology.

But those facts didn’t stop the DoD OIG from criticizing the contracting officers’ use of those cases to disagree with similar DCAA findings; the OIG audit report stated “The contracting officers’ interpretation of the Metron and JF Taylor cases is inaccurate.” In our view, the DoD OIG’s interpretation of those cases, which seemingly relies on a DCAA talking point memo, is inaccurate.

For example, the OIG ignores the August 2012 Board’s decision rejecting the government’s motion for reconsideration in the J.F. Taylor case. In that motion, the government expressly argued that the decision “was inconsistent with Techplan and ISN”—an argument that the Board dismissed, writing –

We considered Techplan in our decision and found that JFT was challenging step 6 of the Techplan analysis. Here we were presented with evidence that DCAA used a 10% ROR regardless of the variability of the data, evidence not presented in Techplan and we evaluated the reasonableness of the compensation in light of that evidence. Neither party in Techplan or ISN offered any statistical analysis of the ROR or raised the same arguments as did JFT and thus the issues were different. It should not be surprising that the outcome could also be different.

Read that paragraph above carefully. The Board expressly rejected DCAA’s use of an arbitrary 10% RoR “regardless of the variability of the [benchmark survey] data.” Clearly, the Board found that DCAA’s rigid approach was not in compliance with Techplan. The DoD OIG audit report curiously omits this factual finding—a fact that would tend to support the DCMA contracting officers’ decisions to non-sustain DCAA’s audit findings in this area. Instead, the OIG report recommended that, when contracting officers disagree with DCAA, they should consult with legal counsel to obtain a “legal opinion to ensure that their interpretation of the FAR was accurate.”

Now, this is new. According to the DoD OIG, whenever a DCMA contracting officer disagrees with a DCAA audit finding, that contracting officer is now prohibited from using independent business judgment and must, instead, refer the matter to legal counsel. In other words, that warrant isn’t worth very much. The basis for the OIG’s position seems to be a single sentence within DCMA Instruction 126, which states “If the ACO disagrees with the audit findings and the disagreement is based on an interpretation of a law or regulation, the ACO should consult with the supervisor and Agency legal counsel.” We see the word “should” in that sentence, which is a far cry from the word “shall,” which would denote the imperative. In other words, “should” is discretionary and the OIG audit report finding is largely based on flipping a discretionary action into a mandatory action—and then criticizing contracting officers for exercising their discretion.

Let’s note that the Director of DCMA agreed with the criticisms and associated recommendations. The DoD OIG audit report stated—

The DCMA Director agreed [with OIG’s recommendations] and stated that DCMA will take two immediate actions. First, DCMA will encourage contracting officers to use its Indirect Cost Control email box to ask questions on executive compensation issues. DCMA personnel with appropriate experience will monitor the email box and provide guidance to the contracting officers. Second, DCMA will post training slides covering executive compensation on the DCMA intranet page. By March 31, 2019, DCMA will issue a memorandum that formally notifies all contracting officers of these two resources.

 

In addition, by September 30, 2019, DCMA will conduct training sessions on the proper techniques for evaluating questioned executive compensation.

 

In a subsequent March 11, 2019, e-mail, the DCMA Contract Policy Director clarified that the planned training sessions will comprehensively address the topics addressed in this report, including DCAA’s use of an RoR factor, the addition of locality pay, and the grouping executives into one job class.

What is a poor CO to do? If they don’t do their jobs, they get criticized. If they do their jobs and follow their Instructions, they get criticized. It’s a wonder any CO stays with DoD.

Last Updated on Friday, 19 April 2019 04:06
 

How to Determine if a Contractor Has an Adequate Accounting System

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A cost-reimbursement contract may be used only when … The contractor’s accounting system is adequate for determining costs applicable to the contract or order. …” (FAR 16.301-3)

In the event that a contractor’s accounting system contains deficiencies, even if it has been disapproved, a cost reimbursement contract is not prohibited if the contracting officer determines that the contractor’s accounting system is adequate for determining costs applicable to the contract or order.” (DFARS PGI 242.7502)

Most readers know that an “approved” or “adequate” accounting system is (generally) a prerequisite for obtaining award of a cost-type contract. In my recently completed SDSU-CES class “Financial Management of Government Contracts,” I taught my 29 students that there are three levels of accounting systems adequacy.

The first level of adequacy is documented via Standard Form 1408. The SF 1408 contains yes/no questions; when the questions have been appropriately answered by an independent reviewer, then the contractor’s accounting system is officially adequate.

The next level of adequacy is established by the DFARS clause 252.242-7006 (“Accounting System Administration”). That clause establishes 18 criteria for determining whether a contractor’s accounting system is adequate. Although the criteria are too often subjective and DCAA’s track record in consistently applying them is uneven, they are what they are. Hit them and you have an adequate accounting system. Miss them and you don’t.

The third and final level of adequacy is much the same as the second, in that adequacy is established by the 18 criteria in the DFARS contract clause. The only difference is that, in addition to that contract clause, the contractor also has another DFARS contract clause: 252.242-7006 (“Contractor Business Systems”). That additional clause prescribes mandatory payment withholds for inadequate or disapproved contractor business systems—including the accounting system. Any “significant deficiency” is sufficient to cause a business system to be inadequate, potentially costing the contractor millions of dollars in deferred cash flow.

As noted, many readers already know this. But we recently learned of another way of determining whether a contractor’s accounting system is adequate. It was so novel that we felt compelled to write about it here.

This new, innovative, approach was discussed in a recent bid protest decision at the U.S. Court of Federal Claims. In that decision a disappointed bidder, Citizant, protested its exclusion from the competitive range for the GSA’s Alliant 2 Small Business GWAC opportunity. Bidders were chosen based on verified scoring, with certain attributes carrying certain point scores. The higher the point score, the higher a bidder would be in the competitive range. An acceptable cost accounting system (“CAS” in the Alliant vernacular) was worth 5,500 points.

In order to earn the 5,500 points, bidders were required to “provide verification from the [DCAA, DCMA], or any other Cognizant Federal Agency of an acceptable accounting system that has been audited and determined adequate for determining costs applicable to the contract or order in accordance with FAR 16.301-3(a)(3).” Seems pretty straight-forward, right?

Not so fast.

According to the decision—

An offeror provided the necessary verification by submitting four pieces of information: (1) the contact information for its agency representative, (2) a letter from the auditing agency attesting that its CAS had been audited and determined adequate, (3) an averment that it had not materially changed its CAS since its last audit, and (4) its Dun & Bradstreet (“DUNS”) number and Commercial and Government Entity (“CAGE”) code. In lieu of submitting the letter from the auditing agency, an offeror could submit a statement of certainty in which it averred that it possessed an audited and adequate CAS. An offeror expressing such certainty to the CO triggered the CO’s obligation to contact the auditing agency to verify that the offeror’s CAS was acceptable, and the GSA agreed that it would only deduct the 5500 points ‘[i]f after reasonable efforts the [CO was] unable to obtain audit verification from the [auditing agency].’ Regardless of the verification method chosen by the offeror, it needed to submit the requisite materials in volume 4.

(Internal citations omitted.)

In its protest, Citizant asserted, and the Judge found, that two offerors who had been selected for award “attempted to validate their experience by submitting a letter from the DCAA addressing the adequacy of their incurred cost proposal (‘ICP’). In those letters, the DCAA stated that each offeror’s ICP was adequate and not selected for an audit…. Relying on those letters, the CO determined that both offerors had validated the points they claimed for their CASs.”

In other words, the CO found that a contractor’s ability to submit an adequate proposal to establish final billing rates, as required by contract clause 52.216-7, was tantamount to having its accounting system reviewed and determined to be adequate. According to the GSA contracting officer, “This is evidence that the contractor is engaged in cost reimbursement contracts and the determination of accounting systems adequacy is a requirement of cost reimbursement contracts.”

Yeah, no. It’s not the same thing at all.

And Chief Judge Sweeney knew that. She wrote that the contracting officer’s evaluation —

… is irrational for two reasons. First, the DCAA’s review of an ICP is not unequivocal evidence that the contractor has an adequate CAS. The DCAA’s assessment of an ICP is evidence that the contractor has an adequate CAS only if the ICP was submitted in connection with a cost-reimbursement contract. Because the type of contract associated with [. ..] and [. ..] ICPs is not evident from their respective proposals, the CO could not rely on the DCAA letters to conclude that those offerors possessed an adequate CAS. Second, the DCAA letters do not indicate that [. ..] and [. ..] CASs were audited and found adequate by the DCAA or another CFA—as required by the solicitation—even if the ICPs were submitted in connection with a cost-reimbursement contract.

In sum, the CO could not rationally conclude that the DCAA letters unequivocally indicated that [. ..] and [. ..] possessed a CAS that the DCAA (or another CFA) had audited and deemed adequate. He therefore acted arbitrarily and capriciously when he relied on the letters to validate the points those offerors claimed for maintaining an acceptable CAS.

(Internal citations/footnotes omitted.)

So far, so good. But Chief Justice Sweeney wrote something that we believe is novel, in terms of evaluating a contractor’s accounting system. She wrote (in footnote 14)—

With respect to assessing whether a contractor possesses an adequate CAS, the limited evidentiary value of an ICP is a function of the contract types that trigger a contractor’s obligation to submit an ICP. An ICP must be submitted in connection with a cost-reimbursement contract or a time-and-materials contract. … The restrictions on those contracts are instructive here; a cost-reimbursement contract can only be awarded to a contractor with an adequate CAS… but there is no similar limitation on the award of time-and-materials contracts… . Thus, a contractor’s submission of an ICP for a cost-reimbursement contract reflects that it has an adequate CAS, but the same conclusion cannot be drawn when the contractor submits an ICP in connection with a time-and-materials contract.

(Emphasis added.)

Thus, according to this decision, if a contractor has the ability to submit an adequate proposal to establish final billing rates for its cost-reimbursement contract(s), then by definition it must have an adequate accounting system. This is a new one for us.

Let’s explore this a bit further. Earlier in the same decision, the Chief Judge wrote—

A government contractor can receive a cost-reimbursement contract without having a CFA provide an audit-and-adequacy determination. See, e.g., FreeAlliance.com, LLC v. United States, 135 Fed. Cl. 71, 73-74 (2017). Indeed, the FAR is silent with respect to how a procuring agency must assess the adequacy of a CAS, see FAR 16.301-3(a)(3), and agencies have accepted materials other than a CFA audit-and-adequacy determination, see, e.g., FreeAlliance.com, 135 Fed. Cl. at 73-74 (describing a solicitation in which offerors could submit a determination from a Certified Public Accountant as evidence that they possessed an acceptable CAS).

Thus, it seems clear that a contractor can receive a cost-reimbursement contract without having DCAA, DCMA, or a cognizant Federal agency make an official determination that the contractor’s accounting system is adequate. If, then, a contractor does receive a cost-type contract without that determination, and subsequently submits its proposal to establish final billing rates, and if DCAA then determines that proposal to be adequate but declines to audit it, under Judge Sweeney’s logic that contractor would then have an accounting system just as adequate as a contractor that passed an SF 1408 or DCAA accounting system review.

It seems to be a bit of an assumption, doesn’t it?

Look again at the second quote at the top of this article. As the DFARS PGI makes clear, a contractor can receive a cost-type contract even if its accounting system has been found to be officially inadequate by DCAA, DCMA or a cognizant Federal agency. Moreover, when you factor in DCAA’s propensity for not auditing contractor proposals to establish final billing rates with the logic manifested above, you may come to the conclusion that the Chief Judge has made more than a bit of an assumption; you may well conclude that she's made an error of law.

On the other hand, it’s buried in a footnote and, arguably, not material to the decision. Thus, it may be considered to be dicta. Unless you are one of those contractors with a cost-type contract but without an official accounting system adequacy determination—in which case, you may want to retain a link to this decision for future use.

Last Updated on Thursday, 18 April 2019 17:38
 

Small Business Stuff

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In our last article, we asserted that the FAR Councils were “years behind” in implementing regulatory rule changes promulgated by the Small Business Administration (SBA) in the Federal Acquisition Regulation. For those that may not know, the SBA promulgates its rules in Volume 13 of the Code of Federal Regulations (CFR) but the FAR is found in Volume 48 of the CFR. Each carries equal regulatory weight, except that it is the FAR Part 48 contract clauses that, by and large, end up in government contracts. Thus, it’s important that the FAR Councils work hard to keep 48 CFR Part 19 (“Small Business Programs”) consistent with what the SBA is saying over at 13 CFR. They haven’t done their jobs.

Evidence for our assertion can be provided. For one recent example, check out CAAC Letter 2019-1. Again, for any readers that may not know, the Civilian Agency Acquisition Council is one of the two Councils that make up the group that maintains the FAR and issues regulatory revisions (the other is the Defense Acquisition Regulation Council)—collectively known as the “FAR Councils.” For those that want to know more about these groups, here’s a link to FAR 1.201.

Anyway, let’s discuss CAAC Letter 2019-1. It authorizes (civilian) agencies to “implement regulatory changes made by the Small Business Administration to limitations on subcontracting in its final rule published in the Federal Register at 81 FR 34243 on May 31, 2016.”

Stop right there. Read the date on which the SBA published its final rule.

That’s right. It was nearly three years ago.

And since that time, crickets from the Councils whose job it is to align the FAR with the rest of the Code of Federal Regulations.

Nice job there, folks.

Meanwhile, “Agencies are advised to review any relevant clauses in their supplement and take any action that is appropriate. Once processed, agencies are requested to share the deviation widely among their workforces to ensure full awareness of and compliance with the revisions to the limitations on subcontracting.”

Meanwhile, “It is recommended that the deviation be made effective until the FAR is amended by the FAR case.” You know, that same FAR Case opened in 2016 that hasn’t actually been finalized yet. So in the meantime, just keep on deviating from the FAR in order to implement the rules and regulations of our sister agency at SBA. Because … the rule-making machinery isn’t working well today—nor has it for the past three years.

Onto a related topic: Small businesses and innovation.

Innovation is something we’ve written about before. Many times. (Do a keyword search from the home page.)

A recent article posted at DefenseNews.com (by Jill Aitoro) got us thinking. Ms. Aitoro’s article reiterated a “Twitter storm” by Trae Stephens, a former employee of Palantir Technologies and, more recently, co-founder of Anduril Industries, a company in Orange County, California, “created by tech innovators on a mission to solve critical defense problems, Anduril’s business model brings Silicon Valley ingenuity and funding to defense.” (According to the company’s website.)

Mr. Stephens apparently was responding to comments from Ellen Lord (Under Secretary of Defense for Acquisition and Sustainment) in which she “expressed concern … with the ability of innovative small businesses to secure their [information] systems.” Mr. Stephens took issue with those comments. He asserted that “This is yet another example of the common misuse of the term ‘small business’ across the Department of Defense.”

The comment that got us thinking though, was this: “There is a huge difference between a low-growth/low-headcount business and a high-growth/product-focused tech startup. We need to stop lumping these together.”

In other words, not all small businesses are the same! Treating every small business as being the same ignores the fact that some small businesses are not high-tech, innovation-focused entities. They are the traditional “mom-and-pop” businesses that, so often, supply machining and finishing services. (That’s not to say that those entities don’t innovate; but they are innovating “within the box,” so to speak.) In contrast, other small businesses are high-tech, focused on disruptive innovation. Those are the small businesses that will drive the future of defense.

Mr. Stephens discussed the recent USAF “pitch day” in which some small businesses received SBIR contracts in less than 15 minutes, simply based on their pitches. That’s a great thing! But Mr. Stephens pointed out that more than 50% of the companies invited to the “pitch day” lacked venture capital funding. He also noted that the contracts awarded were “non-recurring and average less than $100,000” in value. Ms. Aitoro reported that he also stated in an interview that “In addition, most contracts were for cyber and services – not product development. Not to diminish the importance of cyber and services, but were those contracts breaking new ground? The work could probably be performed by any number of companies.”

Moreover, he noted, Northern Virginia companies outnumbered California companies by three-to-one, and that “almost half” the companies at “pitch day” were founded more than 10 years ago. Ms. Aitoro reported that he amplified on his Tweets with the statement that those companies were “not exactly the definition of a ‘Silicon Valley startup.’ Now, innovation is not isolated to California, but it appears the winners here follow[ed] a pretty standard playbook for Pentagon small business contractors in both the scope of work and the makeup of the businesses.”

In other words, according to Mr. Stephens, the companies at the USAF “pitch day” were largely run-of-the-mill small Pentagon contractors that were not very likely to be the high-tech innovators that DoD says it’s looking for. He summed up his position thusly: “… an alien race looking down would reasonably think that it is the official policy of the U.S. government to encourage small businesses to not become large or successful businesses.”

He also said: “If you’re serious, prove it. Innovation theater is great (and easy), but we need to start writing meaningful contracts to new entrants with the skills/technologies that the DOD lacks.”

In related news, the Small Business Administration has announced its “SBIR Road Tour” with the goal of “seeding America’s future innovations”™. Let’s look at the planned stops on the Road Tour.

Oh, look. There are no stops planned for California. None for Oregon or for Washington.

Hmm, guess there are no small business innovators located in those states …

Meanwhile, the Silicon Valleys of Kansas, Oklahoma, South Dakota, and North Dakota each get a stop on the tour.

Last Updated on Tuesday, 09 April 2019 18:11
 

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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.