There are many reasons to criticize the process by which the Defense Contract Management Agency establishes what it considers to be acceptable Forward Pricing Rates for defense contractors to use in bidding contract awards. There are many reasons to use as the basis of criticism, and we’ve not been shy about offering them on this blog.

The process is too bureaucratic. It has too many layers of oversight and review. It takes too long. By the time the government’s position is issued, the contractor has often already submitted a new set of Forward Pricing Rates. The process often results in rates that are arbitrarily – some might say punitively – low, with insufficient justification for the ACO’s position. The differences between the contractor’s position and the government’s position often leads to protracted and adversarial negotiations between the contractor and the buying activity.

As you can see, there are many reasons to criticize DCMA’s existing process. And now the Department of Defense Office of the Inspector General has found a couple more reasons to criticize the process.

The thing is, we believe the DOD IG’s criticisms are inapt. We believe that the IG’s recommended process improvements, if implemented by DCMA, would tend to exacerbate the existing issues in the problematic process rather than improve the process. The DOD IG’s recommendations will neither streamline the process nor result in issuance of more timely Forward Pricing Rates. The DOD IG’s recommendations will neither reduce costs nor increase efficiency. Quite the contrary, actually.

As we see it, the DOD IG would like to take the existing process with all its problems, and make those problems worse. The DOD IG would like to slow down the process and make it more bureaucratic. The DOD IG would like the ACO’s to “paper the file” more so as to aid in more management oversight and review.

What are we talking about?

Allow is to quote from the DOD IG summary of findings, pulled from the audit report summary—

[Current] DCMA policy does not adequately address Federal Acquisition Regulation (FAR) requirements to (1) perform cost analysis to establish fair and reasonable forward pricing rates, (2) tailor the requests for audit services, and (3) document a contract case file.

Let’s take those three findings (and concomitant recommendations) one at a time, shall we?

1. Current DCMA Forward Pricing Rate policy does not adequately address the FAR requirement to perform cost analysis so as to ensure that the indirect rates established are “fair and reasonable.” We do agree that “fair and reasonable” is the goal, though of course we rarely experience achieving that goal. Instead, we too often see Forward Pricing Rates established lower than the contractor would like, so as to “protect the Government’s interest.” Regardless, the IG would like DCMA ACO’s to perform cost analysis on the contractor’s Forward Pricing Rate Proposal (FPRP) because performing that cost analysis is better than not performing it.

The DOD IG provides a beautiful example of circular logic in its rationale. According to the IG, FAR 42.1701(b) “requires that the ACO shall obtain the contractor’s forward pricing rate proposal and require that it includes cost or pricing data that are accurate, complete, and current as of the date of submission.” Because the contractor is submitting cost or pricing data, FAR 15.404-1(a)(3) “requires that ‘cost analysis shall be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data are required.’”

Basically, the IG said that because the DCMA required contractors to provide cost or pricing data in support of their FPRPs that meant that DCMA was required to use cost analysis to evaluate the contractors’ submissions. Had the DCMA not required cost or pricing data, then no cost analysis would have been required. Had the DCMA not required cost or pricing data then it would have been free to evaluate the FPRPs in any which way it chose to do so. Forget the purpose of Forward Pricing Rates; forget why cost analysis is to be used: if you have cost or pricing data then you are negligent unless you use cost analysis to evaluate the data. That was the DOD IG’s position on the matter.

Now the first problem we have with the IG’s position is that FAR Part 15 does not apply to contractors’ FPRPs. The scope of FAR Part 15 (which is established at 48 CFR § 15.000) clearly states that “This part prescribes policies and procedures governing competitive and noncompetitive negotiated acquisitions. A contract awarded using other than sealed bidding procedures is a negotiated contract (see 14.101).” A proposal to establish a Forward Pricing Rate Agreement (FPRA) is not an acquisition.

It’s not an acquisition because the FAR defines the term “acquisition” at 2.101.

‘Acquisition’ means the acquiring by contract with appropriated funds of supplies or services (including construction) by and for the use of the Federal Government through purchase or lease, whether the supplies or services are already in existence or must be created, developed, demonstrated, and evaluated. Acquisition begins at the point when agency needs are established and includes the description of requirements to satisfy agency needs, solicitation and selection of sources, award of contracts, contract financing, contract performance, contract administration, and those technical and management functions directly related to the process of fulfilling agency needs by contract.

Since no appropriated funds are being used to acquire goods or services when an FPRP is being evaluated and negotiated, the process is not an “acquisition” as that term is used in the FAR. And since the process by which an FPRP is turned into a FPRA (or FPRR) is not an acquisition, you can’t apply the policies and procedures for evaluation of an acquisition to that process.

It doesn’t matter what FAR 15.404-1(a)(3) says because FAR 15.000 says it’s not applicable. The DOD IG’s position is illogical. It doesn’t parse. So right off the bat, we have a problem with the IG’s findings and recommendations.

Because the DOD IG starts off from an inapposite premise, its further discussions of the analysis of detailed “elements of cost” are worthless.

That didn’t stop the Director, DCMA, from concurring with them.

That’s right. Instead of pushing back, the Director of the Defense Contract Management Agency agreed with the DOD IG’s inapt reading of the FAR and the circular reasoning it used. According to the IG report, DCMA revised Instruction 130 to “address the requirement to perform cost analysis.” In addition, the revised Instruction “also includes the mandatory use of two checklists that were developed in order to incorporate the DoDIG findings: the FPRP Adequacy Checklist and the FPRA Review Checklist.”

2. According to the DOD IG, if DCMA ACOs would only “tailor” their requests for DCAA field pricing assistance, then DCAA could provide more timely and better input into the FPR negotiation process.

As the DOD IG noted, current DCMA policy establishes that FPRRs are to be established within 30 days of receipt of a contractor’s FPRP, and that FPRAs are to be established within 60 days of receipt. Those deadlines are—shall we say?—difficult to meet. Extremely difficult. When DCAA performs an audit of a contractor’s FPRP, those deadlines become impossible to meet.

According to the IG report, DCAA takes at least 163 days (5 months) to perform an audit of a FPRP, and its average turn-around time is 189 days (more than six months). (We note that the 2013 average of 189 days is up from the 2012 average of 177 days). Basically, any ACO that relies on DCAA for input into the FPRP evaluation process has just guaranteed that the agency deadlines will not be met. As a result—and as we’ve reported—DCMA has decided to move on without DCAA and has directed its ACOs to evaluate and negotiate Forward Pricing Rates without waiting for DCAA. That sounded like a pretty good decision to us.

Not so fast, according to the DOD IG.

According to the IG, the problem is not DCAA. The problem is DCMA ACOs. The ACOs are not “tailoring” their audit requests so as to permit DCAA to issue their audit reports in time to meet the DCMA deadlines. Use of tailored requests for field pricing assistance can also “help the ACO conduct cost analyses while obtaining the minimum essential supplementary information required for the job.”

We have long thought DCMA and, indeed, the DFARS and PGI, needed more guidance in the area of field pricing assistance. We told the DAR Council as much in the early days of the Proposal Adequacy Checklist. They didn’t listen to us. Accordingly, we can hardly take issue with a recommendation that guidance in that area is lacking.

Moreover, we tend to agree that ACOs should figure out where they want DCAA to help them out, and then ask for help in those areas and nowhere else. We don’t think “tailoring” the audit request will lead to audits being issued in 30 or even 60 days, but it couldn’t hurt.

The foundational premise is that DCAA will listen to the DCMA ACO and scope their audits just to the areas requested. We believe that’s a fairly large assumption. In our experience, DCAA auditors are very sensitive (or should be) to having their audit scopes “limited” or interfered with in any way. We are not optimistic that DCAA will accept the audit “tailoring” that the DOD IG advocates. This may well be a paper recommendation with little if any teeth.

In all honesty, we don’t think this recommendation is going to help, but we don’t think it’s going to hurt either. So why not go with it?

And that is the tack chosen by the Director, DCMA, in the response to the IG audit report. The report stated—

The Director, DCMA, concurred in principle. DCMA identified two obstacles that, in its opinion, could prevent implementation of FAR 15.404-2(a)(1) at this time. First, DCMA stated it cannot dictate or restrict the DCAA auditor’s scope and procedures. Second, the Director stated that DCAA will currently not agree to a tailored request if it needs to rely on work performed by DCMA. DCMA pointed out that it is conducting a pilot project involving the DCMA cost monitoring program to in part evaluate the feasibility of DCAA accepting a tailored audit request. DCMA stated it will amend its policy, as appropriate, based on the results of the pilot.

As we read the foregoing, it seems to say that DCAA cannot (or will not) rely on any cost analysis performed by DCMA. Consequently, DCAA has to perform the entirety of the audit steps its audit program calls for. As a result, DCAA will do what it wants and take as long as it needs. Until DCAA changes its policy, DCMA is stuck. DCMA needs to either wait for DCAA’s audit report or move ahead without DCAA.

Makes sense to us.

3. According to the DOD IG, the current DCMA record management policy does not require the ACO to document and include the cost analysis of contractor FPRPs in a “case file”. Similarly, the ACO is not required to retain information related to “the determination of fair and reasonable prices.” The standard Pre-Negotiation Memorandum (PNOM) does not require a reference to the cost analysis techniques and procedures performed by the ACO. And other similar stuff.

Well, assuming that a cost analysis had to be performed, it would obviously be nice to document and discuss the analytical techniques performed. Unfortunately for the DOD IG, the FAR does not require such cost analysis. So this is pretty much a very big moot point.

Regardless of our position, the Director, DCMA, concurred. DCMA Instruction 130 was revised to address the DOD IG’s concerns.

Why did the Director, DCMA, concur instead of pointing out what we pointed out?

It was probably the path of least resistance.

And so now DCMA ACOs have more work to do, work that is not required by the FAR, but is now required by DCMA Instruction 130.

Good luck with that.