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January 23, 2017 By AMK

A practical program manager’s guide to requests for equitable adjustment

My first experience with a request for equitable adjustment (REA) was brief and decisive. The O-6 program director didn’t literally drop it in the trash bin, but he clearly wanted to.

His message to the development contractor was to not expect any action by the government, despite the contractor fastidiously mentioning it month after month on a chart listing unresolved contracts business. The REA resulted from a technical disagreement between the contractor and the government regarding how much in-scope testing was required to properly resolve a spacecraft test fault.

According to Federal Acquisition Regulation (FAR) subpart 43.2, a contractor requests equitable adjustment — essentially a type of proposal — in response to a unilateral contract change order, but other unplanned changes to contract terms, such as a late delivery of government furnished property (GFP) or disputes over scope, can lead the contractor to send an unexpected REA.

In the daily life of a program office, REAs are rare because planned contract changes are accompanied by requests for proposal. Likewise, when the contractor and government agree about an unplanned change, the program manager (PM) would treat the REA similarly to any other proposal. However, when the REA results from disagreement on contract terms, delay of work, or scope (either in type or magnitude), the working relationship may become tense if it isn’t tense already. Both the government and contractors must weigh issues of fairness and duty to stakeholders when deciding how to proceed.

Decision making may become emotionally charged, to the detriment of the relationship and program progress.

In the situation described above, the REA was a small blip that did not threaten the program’s overall success — we had an enormous cost-plus satellite contract and recognized the need for all parties to work together to get the spacecraft to the launch pad. The issue slowly died and eventually went away. In that instance, it wasn’t a bad strategy for the government, but it was not the ideal learning experience for a young field grade officer on how to deal with the situation in the future.

Years later I joined an Acquisition Category (ACAT) I equivalent, open-architecture development program using multiple fixed-price contracts with interdependent (but competing) developers. Team members knew going in that we had the perfect environment for spawning REAs. Not only does the government have a duty to respond to contractor requests for adjustment, but unlike my previous experience on the satellite development program, here even a modest REA had the potential to derail the program. The willingness of the associate contractors to work with each other would quickly degrade if they distrusted the government to enforce the assumptions and terms of each contract.

The actions a contracting officer takes to respond to an REA are clearly outlined by the FAR and Defense Federal Acquisition Regulation Supplement (DFARS), but nothing similar exists for technical evaluators. The standard process for evaluating reasonableness of proposed costs is meaningless if there is no way to analyze whether claimed impacts were in scope in the first place.

When the first REA arrived from my open architecture integrator for “low-quality GFP,” we looked for standard guidance on how to handle REAs. Finding none, our team developed a methodology to determine whether REA claims had merit. Taking the contractor’s claim seriously and conducting a dispassionate analysis keeps the interactions professional and de-escalates emotions. Defining an objective process upfront increases acceptance of the result and perhaps more important, it shows that the government is exercising due diligence.

The process we developed includes a flow chart (Figure 1) and a six-step evaluation methodology. It is intended for PMs and action officers conducting a technical evaluation of merits and quanta of the claims and complements the contracting officer’s evaluation.

The six steps in the REA evaluation process are:

Step 1: Establishment of facts.

List all of the claims made by the contractor and sort them into facts the government agrees with upfront and those which require further substantiation. Statements about which the government has no direct knowledge or a conflicting opinion should not be agreed to upfront. Usually the chain of events can be agreed upon by all parties, but a claim that GFP was inadequate (for example) will require supporting evidence. It’s the contractor’s responsibility to provide such evidence.

This step forces the government to articulate and understand what exactly the contractor thinks happened, what it wants, and on what grounds. It establishes the major issues of the REA. It defines the points the government must address in the analysis and for which the contractor must provide support.

Step 2: Examination of scope.

The contract statement of work (SOW) may or may not be very specific. However, in a scope dispute, all relevant paragraphs must be brought forward and considered against the claims. It’s helpful to quote all relevant SOW language and contractual clauses directly in the writeup to facilitate the work of other reviewers.

This is where program management needs to confront the truth of how a contractor could have ended up performing out-of-scope work. Going for a quick and easy kill on scope by broad-brushing the topic will not satisfy anybody, and it probably won’t stand up to legal scrutiny, if it comes to that.

The evaluator should use the relevant contractual language to conclude whether the work was out of scope. If all parties agree on this point, say so. If not, the reviewer needs to present a more detailed argument as to why the work was in scope or not.

Sometimes comparison with the text isn’t enough. The quality or condition of GFP may not be explicitly defined in the contract, but it’s not an excuse to stick the contractor with the added cost of dealing with unreasonably low quality GFP. Contextual factors such as proposal assumptions, reasonable person tests and possible interpretations should be discussed.

Step 3: Review contractual direction.

A contractor cannot self-generate out-of-scope work. After the contracting officer gives authority to proceed, there is a presumption that all tasks started are in scope. It is critical to examine all relevant formal and informal communication between parties. For the benefit of reviewers, list communications such as letters and emails and summarize what was said. Conclude whether the contractor requested direction and if direction was provided by the contracting officer.

Step 4: Substantiate all claims.

If it is the program’s first REA, the contractor may not recognize the need to provide any evidence in support of the REA’s claims. My contractors built REAs just like any other proposal: They predominantly were written by the business team focusing on cost data and pricing labor hours, so the impact basis of estimate was well supported. Justifying the claim was given cursory treatment by contracting staff, if not ignored completely. Resist the temptation to handle this in negotiations—making the contractor write down its justification will force it to think matters through.

By this point, looking at scope and contractual direction should give the action officer an idea about where the evaluation will end up, but it is still necessary to analyze any evidence provided by the contractor. Analyze the logic and applicability of arguments and contract interpretations. If the REA justification is weak or nonexistent, be clear in the writeup about what is missing.

Step 5: Minimization.

The contractor has a duty to minimize out-of-scope work and perform in-scope work first. When operating where REAs are being generated, the government PM needs to embrace this principle—it provides the only downward cost pressure for an REA. Contracting normally relies on competition or negotiation backed up by engineering expertise to secure fair prices for the government, but REAs have no such protection. If the contractor allows out-of-scope, unnegotiated work to occur in place of negotiated work defined by the SOW with the expectation that it can be reimbursed through an REA, the government has lost control of the program.

Another consequence of minimization is that negotiating an REA is not simply a matter of negotiating actuals. For example, if the contractor decided to perform the work with Level 5 engineers but could have used Level 3s, the government is fully justified in taking exception. If this were in-scope work, cost would have been controlled first by negotiation and then by cost incentives. With an REA, the minimization principle is the primary lever.

From a practical standpoint, this step is an extension of the previous one. However, there is value in keeping this step separate so that a reviewer can easily see which costs were substantiated in Step 4 and what incremental adjustments were made in Step 5.

Step 6: Reciprocal consideration.

If the government has any reciprocal or offsetting equitable adjustments against the contractor, this is where positive and negative dollar amounts cancel each other out to produce a lower or zero net payment. Theoretically, the government could press that other claim against the contractor separately and receive funding back (similar to a descope proposal), but this is so rare I have never seen it prove worth the effort. Despite this, the government should never give up leverage on contractor performance—it is still valuable.

Where the contractor refuses to drop the REA, a trade gives the contractor PM something to sell to his or her corporate management. The trade doesn’t need to be dollar exact— the flexibility afforded by negotiations could allow the contractor PM to make the trade fit even when the amount supported by government analysis is lower than the contractor’s original request.

Gray Areas

The REAs my team dealt with generally fell into two categories—some sort of problem with GFP or proposal assumptions being violated. We spent many long evenings weighing various factors to determine how much liability fell in the government’s corner.

In one case, our contractor started in-scope work and continued working even past the point where the contractor considered it to be out of scope. The contractor received a buggy GFP software delivery for integration into the weapon system, but the software code required extensive troubleshooting, repeated attempts at integration, and integration of multiple drops once the software was fixed. Although the work was in scope, they made a good point that they didn’t sign up for unlimited integration costs in their fixed-price proposal. Nobody knew what constituted a reasonable upper limit, but we all theoretically agreed one existed. In this case, the auto-generation principle decided the way forward: As soon as the contractor thought work was out of scope, it should have stopped and requested direction before proceeding. Finishing work, later deciding it’s out of scope, and submitting a REA is irresponsible.

In another instance, low-quality GFP also caused the contractor to work less efficiently than it had bid. We all agreed it would have been impractical to request direction. The contractor had a fairly strong case when this happened, except that the SOW, not proposed price, determines the limits of scope. To allow otherwise is to reward the contractor for low-balling the bid. This is especially true if the bid was competitive (it was) and the GFP condition is not documented in the contract (it was not). At the end of the day, the government met the letter of the contract. The argument was bolstered with an “experienced contractor” standard—an experienced bidder should always expect some level of integration difficulty.

In a final case, a subsystem provider underbid the amount of integration support (software bug-fixes) required for the quality and maturity of their offering. The contractor planned to do this work during system integration but did not win the integrator contract, putting all parties in an awkward position. In pushing the contractor to comply with the SOW and continue bringing the subsystem up to specification, we discovered the practical limits of fixed price contracting. The contractor sent an REA claiming the extraordinarily high amount of support required exceeded its interpretation of the SOW. This REA did derail the program, and we were at the point of deciding between litigation and finishing the weapon system. The government sustained the request and finished the system.

The Big Picture

Although supporting an REA is disadvantageous to the government, the objective of this process is not to summarily crush all REAs. It was designed to produce a transparent position all parties can understand. Sometimes even airtight logic isn’t enough to satisfy the contractor. They are accountable to corporate management, financial, and shareholder concerns and may not be free to simply drop an REA if the corporation sees a reasonable chance of success. Although the REA disposition is unilateral, the contractor can always initiate a legal claim. A thorough and well-reasoned government analysis decreases the likelihood and success of litigation.

When it comes to building a weapon system, contractor and government PMs are in it together. The contractor’s decision to send an REA and the government’s disposition both take place in the context of the larger relationship. I have seen government PMs give away the farm in the interest of maintaining a good working relationship, and I have seen working relationships degrade to the point of yelling phone calls and slow progress. It’s important to navigate between extremes with full understanding of the short- and long-term costs of a decision to support or reject a contractor’s request for equitable adjustment.

The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Air Force, the Department of Defense or the U.S. Government.

Source: Defense AT&L Magazine, Jan-Feb. 2017 – http://www.dau.mil/publications/DefenseATL/DATLFiles/Jan-Feb2017/DATLJan_Feb2017.pdf

Filed Under: Government Contracting News Tagged With: acquisition workforce, AT&L, consideration, contracting officer, DFARS, equitable adjustment, FAR, GFP, PCO, price reasonableness, program management, program manager, property, proposed costs, REA, technical evaluation

April 12, 2016 By AMK

Establishing GSA order pricing may become more complicated

As commercial item contracts, GSA Schedules are subject to streamlined acquisition procedures intended to make the procurement process more efficient. One of the biggest advantages the Schedules offer ordering agencies is pre-negotiated pricing that has already been determined to be fair and reasonable.

GSA Schedule Contract logo Over the past several years, concern about pricing variability among the same or similar items on different schedule contracts led some agencies to publicly question whether they could rely on rates negotiated by the General Services Administration (GSA).

In March of 2014, the Department of Defense (DoD) issued a class deviation to FAR 8.404(d) requiring its contracting officers to make their own determination that GSA order prices were fair and reasonable using the proposal analysis techniques under FAR 15.404-1. NASA quickly did the same.

With federal procurement policy, where DoD goes, other agencies frequently follow. It isn’t surprising then that a new FAR case (2015-021) came out a year later proposing to overwrite 8.404(d) to match the language in the class deviations. If this FAR case makes it through the rulemaking process, it means that ordering agencies will have to complete a fair and reasonable price evaluation for all GSA schedule orders.

At the very least, agency contracting officers will be required to “obtain appropriate data, without certification, on the prices at which the same or similar items have previously been sold and determine if the data is adequate for evaluating the reasonableness of the price.” GSA’s contracting officers already do this when negotiating schedule pricing.

Keep reading this article at: https://www.govloop.com/community/blog/establishing-gsa-order-pricing-may-become-complicated/

Filed Under: Government Contracting News Tagged With: class deviation, DoD, fair and reasonable, FAR, GSA, GSA Schedule, GSA Schedules, price reasonableness, pricing

April 7, 2016 By AMK

Price reasonableness determinations for FSS supply orders by Army’s Huntsville operation need improvement

The Inspector General (IG) of Department of Defense (DoD) reports that contracting personnel at the U.S. Army Engineering and Support Center, Huntsville (CEHNC) did not adequately document and support their price reasonableness determinations for 25 Federal Supply Schedule (FSS) orders, valued at $10 million.

CEHNCThe IG reviewed a total, non-statistical sample of 33 orders, valued at $13.6 million.  The IG’s office determined that CEHNC contracting personnel relied on:

  • Inadequate independent Government estimates for all 25 orders. This occurred because they relied on the expertise of the preparers of the Independent Government Estimates (IGEs) rather than having the preparers document and support the basis of the estimate as required by the Army Federal Acquisition Regulation Supplement and U.S. Army Corps of Engineers guidance. In addition, while the contracting officers stated that they took training on preparing IGEs, they did not document that they completed that training.
  • Vendor quotes were eliminated from consideration for technical reasons for 7 of the 25, valued at $3 million, without verifying whether the prices were still valid for comparison purposes. The contracting officer involved in the actions admitted that this was an oversight.
  • CEHNC contracting personnel relied on price reasonableness determinations that were not approved until after the award of 4, valued at $1.76 million, of the 33 orders. Again, the contracting officer stated that this was an oversight.

Bottom line, the IG determined that CEHNC did not have guidance requiring contracting personnel to approve price reasonableness determinations before awarding orders. As a result, CEHNC’s customers may have paid more than they should have for the supplies purchased.

In its report, the IG recommend that:

  • Refresher training be conducted, detailing contracting officer’s responsibilities for developing, reviewing, and approving IGE’s;
  • Completion of such training by contracting personnel be documented;
  • Guidance be developed and implemented requiring contracting personnel to verify that the prices from quotes eliminated for technical reasons are valid for comparison purposes when making price reasonableness determinations; and
  • Guidance be developed and implemented requiring contracting personnel to approve price reasonableness determinations before awarding orders.

The IG’s complete report can be viewed at: http://www.dodig.mil/pubs/documents/DODIG-2016-069.pdf 

 

Filed Under: Government Contracting News Tagged With: ACE, Army Corps of Engineers, CEHNC, DoD, fair and reasonable price, FSS, GSA Schedule, IG, IGE, OIG, price reasonableness, reasonable price

August 20, 2015 By AMK

Incomplete contractor info made it difficult for DoD to determine noncompetitive contract prices

The Defense Department had trouble determining reasonable prices for noncompetitive contracts because some contractors wouldn’t share pricing information, according to an Aug. 12 Government Accountability Office (GAO) report.

GAO-GovernmentAccountabilityOffice-SealNormally, DoD relies on competition to ensure that it pays a reasonable price for its goods and services. But for noncompetitive contracts, DoD relies on other methods including information from previous contracts or from the contractors themselves, GAO says in the report.

The DoD requested pricing information from contractors for 12 of 32 noncompetitive agreements in GAO’s sample. For the remaning 20 contracts, DoD felt it already had enough information to make sure it was getting a reasonable price.

Keep reading this article at: http://www.fiercegovernment.com/story/incomplete-contractor-info-made-it-difficult-dod-determine-noncompetitive-c/2015-08-13

Filed Under: Government Contracting News Tagged With: competition, DoD, GSA, noncompetitive, price reasonableness

August 18, 2015 By AMK

New DFARS proposed rule on commercial items acquisition and subcontracting: An end run on Congress?

On Monday, August 3, 2015, the Department of Defense (DoD) issued a long-awaited proposed rule that could have a significant impact on how the DoD and prime contractors procure commercial items.  

US DoD logoThe Proposed Rule is said to merely implement Section 831(a) of the Fiscal Year 2013 National Defense Authorization Act (NDAA), but goes much further, proposing significant substantive changes to what qualifies as a “commercial item” under DoD-funded contracts and imposing significant burdens on prime contractors to gather data from their commercial item subcontractors.

Section 831 directed DoD to, among other things, issue guidance including “standards for determining whether information on the prices at which the same or similar items have previously been sold is adequate for evaluating the reasonableness of prices.”  Section 831 was, in part, a response to DoD’s recent efforts to narrow the broad commercial item paradigm created by Congress in the 1990s, including a 2012 DoD legislative proposal to change the statutory and regulatory definition of “commercial item.”

Specifically, DoD requested legislation to grant DoD greater access to cost or pricing data associated with commercial items and sought to change the definition of commercial items to exclude items that are merely “offered for sale” or “of a type” offered for sale in the marketplace.  Congress declined to make those changes, recognizing the Federal Acquisition Streamlining Act (FASA) purposefully includes a broad definition of commercial items in order to ensure that the federal government has access to products available in the commercial marketplace.

Keep reading this article at: http://www.mondaq.com/article.asp?articleid=419112

Filed Under: Government Contracting News Tagged With: certified cost, commercial item, Congress, cost or pricing data, DFARS, DoD, FASA, market-based pricing, NDAA, price reasonableness, proposed rule, streamlined acquisition process

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