Contracting for BenefitsContracting for Benefits With fringe benefits coming under increased scrutiny, for those organizations that still have certain benefits, such as healthcare, prescription drugs etc., it takes some special attention to successfully...

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State & Local Government ContractingState & Local Government Contracting With all the turmoil in the news about State and Local Government budget issues etc., what is in store for that segment of our profession?  If budgets are squeezed tight, can there be a future for a contracting...

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Government Shutdown LoomsGovernment Shutdown Looms As the 112th Congress tries to get its act together, there is a possibility that the federal government will "run out of money" on March 4th.  It is a complicated subject and the entire government does...

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New Arms Race?New Arms Race? With the Defense Department facing budget cuts both from within and by Congress, it is interesting to see the reports that China has stepped up their defense spending.  First, they can because they are...

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Court rules against SAICCourt rules against SAIC On December 3, 2010, the U.S. Court of Appeals for the D.C. Circuit issued its much anticipated opinion in United States v. Science Applications Int’l, Corp (“SAIC”) No. 09-5385. The unanimous opinion...

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FAR Case 2010-005 published

Category : Contract Education, Federal Contracts, Regulation & Oversight

FAR Case 2010-005, Updated Financial Accounting Standards Board Accounting References, Proposed rule, published in the Federal Register on February 16, 2011. Comments are due on or before April 18, 2011.  
Submit comments via the Federal eRulemaking portal www.regulations.gov.

Contracting for Benefits

Category : Uncategorized

With fringe benefits coming under increased scrutiny, for those organizations that still have certain benefits, such as healthcare, prescription drugs etc., it takes some special attention to successfully contract for these.  In general, if it is a public agency there is just so much money available and the goal is to maximize benefits for the fixed amont of money.  For a private company, there may be other forcing factors such as maintaining a competitive workforce or surviving in a very competitive environment. 

In either case, the normal practice is to turn over the process to a consultant.  This FRAUGHT with danger.  The consultant cannot be held accountable for failing to follow procedures or making a mistake.  The preferred method is to have a consultant do the homework and research and then the government contracting officer manages the process.  Again here many organizations turn this over to their lawyers.  So the person responsible for contracting stands back and lets the consultant and lawyer run the process.  The main reason is the contracting professional does not understand the process.  This is sad indeed.  It is not that complex.  The consultant should advise the contracting professional and the lawyer should assist on formulating the contract terms and conditions.

Lets assume that an organization needs to contract for dental care.  There are two basic forms of dental coverage:  capitation and indemnity.  In capitation, the organization will pay a provider a fixed amount each month for a set of modalities.  If the provider does not have to provide any service they still keep the fixed amount.  If the provider has to provide substantial service it may be at a loss for that patient in that month.  Over the year, the provider needs to make a fair and reasonable profit for providing coverage to the patients.  Many providers are capitated.  It reduces risk for the employer. 

Indemnity coverage is not fixed but pays the provider reasonable and customary charges for the particular modality.  This coverage normally costs more but gives the patient more flexibility. 

So how does the employer determine a fair and reasonable price for the benefits being provided?  There are market data available on what most companies are providing for what prices.  Then the employer can make a business decision on whether to meet market prices OR provide more to attract top talent, or to provide less to save money.  Once the target is established, the contracting professional needs to maximize the coverage for the money available.

If the benefit is financial, like a 401(k) plan, it is best to solicit proposals from several firms with a great track record.  Again, a consultant with expertise in this area is very helpful.  Also research what other organizations are providing and the success (or not) of their program. 

It is important to remember that contracts for healthcare, prescription medicines and financial benefits may not be in the normal format the organization uses for other services.  Here is where the lawyer can assist in identifying contract terms and conditions that may shift too much risk to the organization. In the final analysis, a fair and reasonable price means risk sharing.  Too much risk on one of the parties and there probably will be consequences.

In any event, the offerors must be limited to those with a proven track record in the service needed.  In this regard, checking with their customers is vital to determine their performance record.

In summary, contracting for benefits is more complex than a lot of services but the professional need not avoid being the lead in these endeavors.  A good contracting professional uses all the talent that he or she can gather and then make a business decision on the best course of action.  In this regard, lobbying is a huge detriment to a fair and reasonable process.  I recommend a clause limiting communications with only the contracting officer OR the offeror’s proposal will be determined to be non-responsive.  It works.

State & Local Government Contracting

Category : Uncategorized

With all the turmoil in the news about State and Local Government budget issues etc., what is in store for that segment of our profession?  If budgets are squeezed tight, can there be a future for a contracting professional in this arena? 

Assuming that the State and Local Governments (there are over 80,000 of them in the USA) do not go out of existence, how will the money flow?  Certainly there will be revenues, albeit lower,  which will need to be spent.  So it is likely to assume they will need to keep people on as police, firefighters etc.  Also some social services, including public health.  So once all those are in place OR continued in place they will need support like supplies and services.  Hopefully those will come primiarily from the private sector.  Therefore, contracting professionals will be needed.  And the efforts for privatization (aka contracting out) will continue because it can be less costly.  Again, need for contracting professionals. 

There is no question that the scarcity of public funds will decrease the amount that will be available for contracting.  But it will not go away.  There will always be contracting needed and as the economy improves the public may again demand more services.  Hopefully, State and Local Governments will be reluctant to hire more employees and contract out.  Elected officials need to control hiring because it brings with it all sorts of burdens, not the least of which is pension benefits.

So there will always be a need for contracting professionals in State and Local Goverments.  The case could be made that now they are in greater demand to help squeeze everything possible out of every public dollar.  Unfortunately, many government contracting people are NOT professionals.  They do not keep current with trends, best practices etc.  They do not sharpen their skills with things like technology and access to information.  The “we’ve always done it this way” prevails.  The public sector protection of poor performers promotes the “Peter Principle” and senior positions get filled over time with marginally competent people. 

What is the solution?  First, good people need to aspire to public service.  I spent 7 years in County government and I heard more than once “how is it at the public trough?.”  It is hard when the perception is that public servants are lazy, incompetent and somehow substandard.  Most are not.  A few are.  Civil Service protections make it very difficult, but not impossible, to weed out bad apples.  Second, the public must demand that employees in contracting positions maintain their education and skills.  We need to look at the training that public employees receive and get rid of the garbage that does NOTHING to improve performance skills.  Third, leaders in State and Local Governments must declare war on meetings.  Endless meetings that rarely produce results.  Meetings that suck the life out of government performance.  It always amazes me when I sit in a meeting and half the attendees are on their Blackberries reading and answering emails.  Oh they will tell you it is “multitasking.”  I say it is doing both tasks equally poorly. 

If you are already in public service, fire up your future.  Study and learn.  Work steadily behind the scenes (low profile is safer) to improve how you perform your work.  Join professional organizations. Read professional literature.  It always amazes me when I ask a “contracting professional” how they stay current and they reply, “I am so busy at work I have no time to stay current.”  It is an all too common crutch.

Government Shutdown Looms

Category : Uncategorized

As the 112th Congress tries to get its act together, there is a possibility that the federal government will “run out of money” on March 4th.  It is a complicated subject and the entire government does not really shutdown.  However, it can complicate matters for government contractors.  For example, most service contracts that are funded with annual appropriations would be impacted.  R&D funded contracts MAY not be impacted.  And each contracting activity could apply the rule differently. 

Contrary to popular opinion or perceptions, government employees who are “deemed non-essential” and sent home do not lose their pay.  Once the shutdown is over they are paid for the time they were not working.   So when you see the interviews on the evening news where some mom is being interviewed and she says “how am I going to feed my children?” know that she will not lose her pay.  She may not collect it for a week or two but she will be made whole.  Frankly it is pretty much a joke and I really hope the House and Senate can work something out to avoide this debacle.

Here is some info for you to ponder:  Facts & figures about government shutdowns http://wapo.st/dEFHSU.

New Arms Race?

Category : Uncategorized

With the Defense Department facing budget cuts both from within and by Congress, it is interesting to see the reports that China has stepped up their defense spending.  First, they can because they are drowning in our dollars.  Second, China is consuming huge amounts of natural resources and is actively buying them up all over the world.  This, in turn, is driving up the cost for us.  Third, why would China want to alarm its biggest customer (us) by building up their military?  They are soon to start building their first nuclear powered aircraft carrier.  They have taken the wraps off of a “carrier killer” missile system.  They have just shown their stealth fighter.

So what does this all mean?  Is China afraid of the US?  Are we afraid of them?  Will this start a new arms race?

We must remember that China has LOTS of money.  OUR money.  They also have a huge labor supply.  It is quite natural that they want to be known as an equal to the US in every way.  So they will build some military hardware to both have and to sell.  This latter is the troublesome part.  They will sell it to North Korea as well as other rouge countries.

For those of you in the defense industry (or as President Eisenhower termed it “the military industrial complex”) it may mean saving some programs from the chopping block.  Since the fall of the Soviet Union we have focused on wars in Iraq and Afghanastan.  We have prepared plans for North Korea to invade the South.  Now the emerging China as a military power adds a new dimension to the equation.

We need to make sure our elected leaders are taking all of this into consideration.  Sure there are programs that can be cut without hurting our readiness.  Is the F-35 too expensive?  Probably.  What is the alternative?  Do we need air superiority fighters?  Can we slow down the production without driving the cost even higher?

Whatever we do it needs to be smarter.  China has “tiger moms” and a huge low tech labor force making all the stuff we buy.  We are innovators.  Lets use that to our advantage.  Do what we do best and hire the rest.

The new Congress has many many formidable tasks on its plate.  Immigration reform.  Deficit reductions.  Programmatic streamlining.  Economic stimulus.  It will be a busy congress for sure.  Lets hold their feet to the fire to stop the bickering and anger.  Lets make them work together to solve these problems.

As far as China goes, ignore them.  Let them make our tvs, umbrellas, furniture and toys.  They cannot live without our consumption.   If they start an expansionist movement, like the Japanese did prior to WWII, we can simply cut off imports from China driving their economy into the ground.  They know it and we know it.

Court rules against SAIC

Category : Federal Contracts, Information Technology Contracts, Regulation & Oversight, Uncategorized

On December 3, 2010, the U.S. Court of Appeals for the D.C. Circuit issued its much anticipated opinion in United States v. Science Applications Int’l, Corp (“SAIC”) No. 09-5385. The unanimous opinion is an important False Claims Act (FCA) decision in at least three respects. First, it embraced a relatively broad “implied certification” theory of civil FCA liability for the D.C. Circuit. Second, and despite its broad holding on implied certification, the opinion stated that a corporate entity may not be found to possess the requisite knowledge for an FCA violation on the basis of a “collective knowledge” theory that pools the knowledge of all of the corporate entity’s employees. Third, the D.C. Circuit held that the value of goods or services provided under a contract must be considered when assessing FCA damages, rejecting the government’s argument that advisory services found to be tainted by an undisclosed conflict of interest were per se valueless. The court did uphold the breach of contract finding which may have significant financial impact to SAIC.

The case is too complex to discuss in this blog.  For a complete description and analysis please see http://www.mckennalong.com/news-advisories-2427.html

The total impact on government contractors is yet to be determined but suffice it to say this will complicate an already complex area.  OCI is a constant concern to contractors and as mergers and acquisitions continue it is very likely that large contractors will face an ever increasing level of risk in this area.  However, the new rule (see my blog of 12/30/2010) may alleviate some OCI risk in certain contracts.

Federal Acquisition Circular 2005-48

Category : Contract Education, Federal Contracts, Regulation & Oversight, Small Business, The Business of Contracts, Uncategorized

FAC 2005-48 amends the FAR as follows:

1-Repeals the Small Business Competitiveness Demo Program (in accordance with  the Small Business Jobs Act of 2010)

2-Personal Identity Verification of Contractor Personnel (requires collecting all forms of Government provided identification once the are no longer needed to support a contract.  Could be major since it gives the contracting officer authority to withhold final payment under a contract.)

3-Terminating Contracts (clarifies that FAR 49 does not apply to commercial items under FAR 12.)

4-Payrolls and Basic Records (deletes requirement of full social security numbers and home addresses on weekly payroll transmittals by contractors.    Contractors must maintain the full records though.)

The full FAC is available at http://www.regulations.gov.

Final Ruling on Conflicts of Interest

Category : Uncategorized

On December 29th the Department of Defense issued the final rule implementing Section 207 of the Weapon Systems Acquisition Reform Act of 2009.  The draft rule issued in April 2010 contained many very restrictive provisions.  It was termed a “one-size-fits-all” approach was strongly opposed by industry as impractical and unwieldy.  The final rule scaled back the proposed rule and made it applicable to major defense weapons systems and systems engineering engineering and technical assistance contracting.

Organizational conflicts of interest occur when a firm has access to nonpublic information that would give it a leg up on competing for work.  Conflicts also could crop up when a contractor is performing tasks that are subjective and could have an impact on its bottom line.  These situations would include a company helping to prepare a statement of work and then bidding on the same project.

The rule mandates that bidders voluntarily disclose facts that could relate to an organizational conflict of interest both prior to award and on a continuing basis during performance of the contract.

The final rule instructs contracting officers to “not impose across-the-board restrictions, or limitations on the use of particular resolution methods” unless they are required  for a particular acquisition.  Resolution strategies also should not restrict the pool of potential offerors and must “promote competition and, to the extent possible, preserve DOD access to the expertise and experience of highly qualified contractors.”

The bottom line is the rule recognizes that it may be in the government’s best interest “to retain the discretion of contracting officers to deal appropriately with particular procurements.  Handcuffing contracting officers, a recent trend, can produce inferior results.  However, it must be noted that contracting officers, in general, are risk averse and most likely will defer their decisions to their legal counsel.

Contractors should recognize that if they do not come forward to disclose these issues, their competitors will likely raise them with a high degree of success during a contract bid protest.  This is most likely an outcome as both the government and industry thread through this new process.

Savvy companies have taken a much more sophisticated approach to conflicts of interest.  It is shortsighted not to put these issues on the table upfront rather than hoping the government will not notice them.

As with any final rule, it depends on how each contracting activity implements the rule.  It is not unusual for one service to put a different spin on implementation at their agencies.

I will provide more information as it surfaces.

For the complete final rule see the Federal Register dated December 29, 2010 (Volume 75, number 249) pages 819o8 to 81915.  Online this is available at wais.access.gpo.gov.

David v. Goliath

Category : Federal Contracts, Uncategorized

A verdict was issued on Wednesday in Virginia’s Fairfax Circuit Court of more than $2.8 million dollars plus interest.  The issue revolved around an interim variance rate invoice.  A subcontractor Thomas Computer Solutions, LLC (“TCS”) against a prime contractor, L-3 Services and L-3 Communications Corporation (“L-3″).  This verdict is one of the ten largest reported verdicts in Virginia this year and the fourth largest verdict involving business claims.

In a future blog I will provide more details from the court documents.  I am sure L-3 is not going to allow this to stand without a fight.   They can drag this out and inflict pain on TCS.

What will 2011 bring?

Category : State and Local Contracts, Uncategorized

The 112th Congress will convene in January.  The House will now be under Republican control.  The question is, what changes can we expect in relation to Federal Contracting?  First, we need to consider the need for deficit reduction.  Programs are going to be cut.  Spending will be reduced.  So we will MOST likely see less money being spent on federal programs like contracting out.  For us here in San Diego, there will be fewer defense dollars to drive our economy.  Second, there will be cuts in social programs.  Here the County of San Diego will feel the axe in many areas.  Reduced funding for non-profits.  Third, there will be some crystalization of the effort in Afghanistan.  We have to get out.  Afghanistan has been a lawless country for thousands of years.  We cannot expect to change a culture like we change our elected officials.

So what is the bottom line?  Defense spending will have to come down.  That bodes badly for San Diego.  Social spending will also have to come down.  That bodes badly for San Diego.  So why, you ask, is holiday spending a little better?  Because people are tired from the financial beating they have taken since 2007. 

Happy Holidays!!!