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Employing Appropriate Contract Types April 9, 2013

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1 Employing Appropriate Contract Types April 9, 2013
Bryan Johns, DAU-LCIC John Fallon, PhD, Principal, Censeo Consulting Group David Banks, JD, Contracts Manager, Censeo Consulting Group

2 Fiscal Uncertainty led to BBP 1.0
Why are we here? “Better Buying Power's goal was, as we said, to do more without more. That is, to get more capability for the warfighter and more value for the taxpayer by obtaining greater efficiency and productivity in defense spending -- what economists call productivity growth.” Deputy Secretary of Defense Ashton B. Carter (November 13, 2012) “…A personal observation is that our workforce have tended to look for school solutions, you know, what's the right answer, I'll do that, that's what leadership wants. And that was the kind of reaction we got to some extent to Better Buying Power So the message here is, you've got to think about what the right kind of contract is to use for the thing you want to do.” Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L) Frank Kendall (November 13, 2012) Fiscal Uncertainty led to BBP 1.0 Lessons Learned from BBP Continued Economic Uncertainty + Sequestration + continued Warfighter Needs…. Led to BBP 2.0 and the unending demand and need to: “Do More Without More”

3 Objectives Evolution of the Better Buying Power (BBP) Initiatives
Ensuring “Best Value” Selecting the Appropriate Methodology Employing Appropriate Contract Types Industry Interpretation and Response Question & Answer Session Intro speakers – emphasize their Govt. and private sector experience Emphasize the goal of this training session and the limitations of an hour Give ground rules for Q&A (2 minutes)

4 Evolution of BBP Initiatives
Better Buying Power 1.0 Target Affordability and Control Cost Growth Incentivize Productivity & Innovation in Industry Promote Real Competition Improve Tradecraft in Services Acquisition Reduce Non-Productive Processes and Bureaucracy Better Buying Power 2.0 Achieve Affordable Programs Incentivize Productivity & Innovation in Industry & Government Promote Effective Competition Improve Tradecraft in Services Acquisition Eliminate Unproductive Processes and Bureaucracy Control Costs Throughout Product Lifecycle Improve the Professionalism of the Total Acquisition Workforce Max time: 5 minutes BBP 2.0 Modifies guidance from BBP 1.0 to stress the importance of using appropriate contract types while continuing to encourage the use of FPI for early production. The key point here is to deliver this message to our students Move away from agency bias (for a specific contract type) Cultivate a “cultural change” The DAU classroom is the perfect environment since we reach across organizations 1. The original BBP emphasized the use of Fixed Price Incentive (FPI) contracts. 2. In BBP 2.0, we are refining our guidance to emphasize the use of the appropriate contract vehicle for the product or services being acquired. 3. The DFAR and FAR provide for a range of contract types for a reason: one size does not fit all. 4. BB2 focuses on improving the training of management and contracting personnel in the appropriate use of all contract types. Let’s also incorporate industry! Program, Inward Facing Focus Holistic, Outward Facing Focus How will DAU Assist DOD Agencies in Transitioning and Implementing the BBP 2.0 Initiatives?

5 Evolution of BBP Initiatives cont.
Incentivize Productivity & Innovation in Industry & Government Increase use of Fixed Price Incentive contracts in LRIP Better define value in “best value” competitions Align profitability more tightly with Department goals When LPTA is used, define Technically Acceptable to ensure needed quality Employ appropriate contract types Use this slide to funnel down to the topics we will focus on during this presentation Spend ~ 1 minute on each bullet Mention that each of these initiatives will directly or indirectly be touched, but that since we only have an hour we will can only slice off a piece (5 minutes)

6 Goal: Best Value Selecting the Appropriate Methodology LPTA
FAR Best Value Continuum - An agency can obtain best value in negotiated acquisitions by using any one or a combination of source selection approaches Goal: Best Value LPTA Trade-off Process If the LPTA source selection method is selected, the technical and past performance requirements should be rigorously and precisely defined to ensure the Government receives something that is truly and rigorously “technically acceptable.” -- The way to obtain the benefits and mitigate the risks of the LPTA process is to award the low-priced, technically acceptable offeror only if it achieves a high standard of technical capability and past performance (e.g., “substantial confidence”). -- setting the technical and past performance criteria at a high level can give the Government confidence that only the most qualified offerors are deemed “acceptable” -- even if that means finding a substantial number of offerors to be technically unacceptable. LPTA does not allow for such complex analysis, and therefore limits the government's ability to make smart, value-based decisions. No more than you would select your surgeon on the basis of "lowest-price with a degree" should the government use LPTA for any of its critical requirements. GAO has agreed, recommending in a 2010 report that the Defense Department should only use LPTA for simple purchases, such as fuel for the Air Force, but not technical or sensitive projects. Likewise, in evaluating embassy security, the Commission on Wartime Contracting found that the use of LPTA created a "race to the bottom that drives security service providers to the lowest-cost solution." Censeo (John): Add point that industry is noticing that government agencies are starting to use LPTA approaches/methods even when the RFP stipulates a trade-off process. The real danger of this approach is potentially forcing contractors to propose on Trade-off RFP’s with an LPTA approach which will likely not generate the ‘best value’ that the government is seeking. Additionally, this type of government approach would inevitably increase protests and would surely discourage industry/government collaboration that BBP promotes. The challenge: When LPTA is used, define Technically Acceptable to ensure needed quality.

7 Defining “Technically Acceptable”
The standards for technical performance should be precisely defined to set the bar sufficiently high to permit industry to compete on price i.e. , “acceptable” rating = an offeror meets appropriately rigorous standards Carefully drafting the technical factors/subfactors will ensure only truly competent offerors are deemed “acceptable.” Use LPTA when: Requirement is clearly definable and the risk of unsuccessful contract performance is minimal, cost or price may play a dominant role in source selection. Use Trade-off Process when: The less definitive the requirement, the more development work required, or the greater the performance risk, the more technical or past performance considerations may play a dominant role in source selection.

8 GAO Case B-406894.2 Building Solutions, Inc
RFP stated award would be made to the offeror with the lowest priced, technically acceptable proposal that had received a past performance rating of substantial confidence. RFP provided the following evaluation factors: price, technical acceptability and past performance Contractor Technically Acceptable Past Performance Price NSR Yes Limited Confidence $9,873,822 BSI Satisfactory Confidence $10,115,232 JDD Substantial Confidence $10,140,765 FAR An agency can obtain best value in negotiated acquisitions by using any one or a combination of source selection approaches. Use this case as an example. Combined tradeoff process/LPTA source selections are expressly permitted. The rule has been the same since October 10, 1997. The RFP didn't violate FAR (a)(2)(iv). In addition, the protestor didn't have a record of past performance. Plus, there have been numerous CG decisions which allow the government to consider the added value of a higher rated past performance of another proposal. The RFP said that the award wouldn't necessarily go to the lowest priced tech acceptable offer, just that there would have to be a trade-off in the event that the LPTA offer didn't rate as "Substantial confidence.“ The DoD's procedures for the trade-off process don't allow the use of a Go/No-Go or Pass/Fail rating system for Past Performance. Although use of acceptable/unacceptable criteria might be allowed for some technical factors with the Trade-off process, the Past Performance factor is further distinguished from the other non-price factors. It is a "confidence assessment" of the offeror’s probability of meeting the solicitation requirements, using a two step evaluation procedure. The first step considers how relevant the past performance information is to the instant acquisition. More relevant past performance ratings have "more influence on the past performance confidence assessment than past performance of lesser relevance." The second aspect of the past performance evaluation is to determine how well the contractor performed on the contracts. Both steps use prescribing rating systems.

9 Employing Appropriate Contract Types
Contract types tend to fall in and out of favor GAO reports, Washington Post articles, political climate, etc., prompts policy change limiting use. All FAR Part 16 contract types are effective at risk allocation/mitigation and incentivizing contractor performance if: properly selected for the situation, and properly executed 2 minutes Training is Key!

10 Employing Appropriate Contract Types cont.
Factors to Consider in Selecting the Appropriate Contract Type Firm requirements Low technical risks Qualified suppliers Financial capability to absorb overruns Motivation to continue This slide will mirror what Mr Assad says about “when to use FPIF” but we will discuss how these standards apply whenever we are trying to select the most appropriate contract type May need to explain “Motivation to continue” (will adjust based on Mr Assad’s comments) Depending on time remaining – can discuss each factor OR simply mention that these factors were covered by Mr Assad and quickly move on.

11 Employing Appropriate Contract Types cont’d Fixed Price
As explained by Federal Acquisition Regulation (FAR) Part 16, FFP contracts establish a price that is not subject to adjustment based on the contractor’s costs. FFP contracts place all risk and responsibility for cost on the contractor, maximizing the contractor’s incentive to control costs. FFP contracts also reduce the administrative burden on the government by eliminating the government’s responsibility to monitor contractor costs. The FAR outlines four considerations to determine if a FFP contract is appropriate: ■The supplies or services have reasonably definite functional or detailed specifications; ■The contracting officer can establish fair and reasonable prices; ■Uncertainties can be identified and their costs reasonably estimated; and ■The contractor is willing to assume the risks involved. FIXED PRICE CONSIDERATIONS

12 Employing Appropriate Contract Types cont’d Fixed Price
Advantages: Adds simplicity and cost efficiency Establish a price that is not subject to adjustment based on the contractor’s costs. Place all risk and responsibility for cost on the contractor, maximizing the contractor’s incentive to control costs. Reduce the administrative burden on the government by eliminating the government’s responsibility to monitor contractor costs. Disadvantages: The inability to predict changing requirements The Government can miss out on savings associated with changes in requirements May actually spend more and incur additional administrative burden. When work requirements grow or decline unexpectedly, funding is reduced, or government offices are reorganized, the impact can be significant. Kendall - Defense AT&L article: he looks for firm requirements, a program with low technical risk, qualified defense companies, the financial capacity to absorb overruns, and a business case that will motivate the contractor to push through setbacks. Balance of risk and delivering a product the military wants. “[Firm fixed price] development tends to create situations where neither the government nor the contractor has the flexibility needed to make adjustments as they learn more about what is feasible and affordable as well as what needs to be done to achieve a design that meets requirements during a product’s design and testing phases,” Kendall wrote. The development portion of contracts receive most of the attention, but the production and sustainment portions of weapons contracts cost the military significantly more. Kendall said spending a little more during development in order to pay less during those later portions of a weapon’s life span saves the Pentagon money overall. Kendall also pointed out the benefits of the government and industry working as partners during the EMD phase and providing the flexibility to balance “financial and technical outcomes” rather than a firm fixed price contract where the focus is “squarely on the financial aspects of the contract.” Censeo (David): While FFP contracts certainly shift performance and financial risk to the contractor, it is worth mentioning the factors that contracting officers should consider when determining the appropriate contract type. If the contractor unfairly assumed too much risk and ran over its budget, what do you think the motivation of that contractor will be to continue to perform? Again, as John and Bryan noted earlier, BBP 2.0 encourages industry/government collaboration and forcing a FFP contract to shift the risk even when inappropriate will not produce long-term, sustainable advantages for neither the government nor industry.

13 Employing Appropriate Contract Types cont’d
Employing Appropriate Contract Types cont’d. Cost Reimbursement Contracts Major reason for use is the inability to accurately estimate costs; Typically resulting from: The lack of knowledge of the work needed to meet the requirements of the contract, for example, under research contracts, which necessarily involve substantial uncertainties The lack of cost experience in performing work, such as the development of a weapons system where manufacturing techniques and specifications are not stable enough to warrant contracting on a fixed-price basis. Key talking points: To mitigate risk and help ensure that the best interests of the government are served when entering into a cost-reimbursement contract, agencies may use this contract type only if the contractor’s accounting system is adequate for determining costs applicable to the contract. This helps prevent situations where contractors bill the government for unallowable costs. Appropriate government surveillance is also required to provide reasonable assurance that the contractor is using efficient methods and effective cost controls. DOD often asks prime contractors to develop cutting-edge systems and awards cost-reimbursement contracts for the work. Because the government often does not perform the up-front analysis needed to determine whether its needs can be met by the contract requirements, significant cost increases can occur under the contracts as the scope of requirements changes or becomes better understood.

14 FFP contracting is not always appropriate
Employing Appropriate Contract Types cont’d. Cost Reimbursement Contracts Advantages In contrast to a fixed-price contract, a cost-plus contractor has little incentive to cut corners. A cost-plus contract is often used when long-term quality is a much higher concern than cost. Final cost may be less than a fixed price contract because contractors do not have to inflate the price to cover their risk. Disadvantages There is limited certainty as to what the final cost will be. Requires additional oversight and administration to ensure that only permissible costs are paid and that the contractor is exercising adequate overall cost controls. Properly designing award or incentive fees also requires additional oversight and administration. There is less incentive to be efficient compared to a fixed-price contract. FFP contracts lack the flexibility to respond to these changes without modifications. Typically move from cost-type to fixed price contracts as programs move from development to production. Joint Strike Fighter example: Moved into the production phase for significant quantities under a cost-reimbursement contract – suggesting that the program still faced significant uncertainties and cost risk FFP contracting is not always appropriate

15 Decisions Matter: Industry Response to Government Contracting Methodologies
Presented by: John Fallon, PhD David Banks, JD,

16 Objectives Explore a Government requirement
Discuss how the framework of the Government’s request impacts Industry’s response

17 Duties of the Government
BBP 2.0 charges the Government (along with Industry) with the duty to act in a thoughtful & innovative manner in all acquisitions Before releasing a Request (RFP, RFQ, etc.), it is imperative to ask the important questions: Are there qualified suppliers for the requirements I intend to issue? Are there any specialized skills required to complete this work (Trade Off vs. LPTA)? Do I have firm requirements (Fixed Price vs. Cost)? Are the Government’s expectations clearly defined to keep technical risk low and avoid overruns (Fixed Price vs. Cost)? To the greatest extent possible, have I built time into the proposal period for clarifications? Does my overall contracting strategy motivate the contractors to continue to participate and provide a viable proposal (Fixed Price vs. Cost)? Primary take-away for this slide is to stress that it is imperative for Contracting Officers, BEFORE deciding on a contract type during the acquisition planning stage, have a firm and clear understanding of the requirements and desired outcomes for the resultant contract. While there is no magical checklist, there are generic, uniform questions such as those on this slide that will serve as indicators re: which family of contracts might best suit a given requirement and its characteristics.

18 Scenario Contract Type??
The Business Development Team at ABC Services Corp (ABC) is conducting its daily review of the FedBizOpps solicitations, in hopes of finding a request that matches the services it provides. A posting from the Department of X piques the interest of the team. The Department wishes to supplement its current staff in order to expedite the compilation of market research relative to a series of initiatives established. The Statement of Work requests potential Offerors to propose the relevant staffing in order to provide a deliverable to the Department. In pertinent part, the SOW is defined in 3 parts: Market Review: Contractor shall assess the market in the various service commodity areas to assess what companies are qualified to do work with the Government and provide their products to a US Base installation in Nation X. Market Interest: Survey the identified companies to assess their capabilities, past performance, financial capacity, and interest in doing business with the Government. Market Assessment Report: Contractor shall provide a report of its findings to the Department within 4 weeks of award. The report shall be issued electronically in the Microsoft Word format. The report shall identify: Current Government Standing Past Performance Experience providing services to Nation X Interest in doing work with the Department Firm requirements Low technical risks Qualified suppliers Financial capability to absorb overruns Motivation to continue This is an actual government agency requirement that our firm recently received. It is a short PoP to do a research/market analysis report for the requesting agency. You will notice that we mapped out the ‘Factors to Consider in Selecting the Appropriate Contract Type’ graphic that Bryan shared with everyone earlier. After detailing the requirement from a high level, transition to David…… Contract Type??

19 Questions from Industry Government’s Responses
The Value of Q&A Ensuring that a Q&A session is included in your bid period is recommended It gives the offerors the opportunity to ask questions in a way the Government may not have originally considered It provides the Government with another opportunity to review and ensure that its requirements are clearly defined Questions from Industry Government’s Responses 1. What specific service areas does the Government intend to have researched? 1. Office furniture, widget manufacturing, and construction equipment 2. Does the Government intend to provide any historical data on previous suppliers for the assessment or should the Offeror anticipate the need to provide expertise in place of receiving information from the Government? 2. This assessment shall be conducted based on, Attachment A, which has been incorporated into this solicitation by Amendment, titled “Department X’s Comprehensive Potential Offeror List, ” 3. Has the Government determined how many companies need to be provided in the assessment, and, if not, when will that decision be made? 3. The report shall identify ten (10) companies per commodity area 4. What are the metrics required for the past performance assessment? 4. Each past performance assessment should include three (3) projects completed within the commodity area being assessed within the past five (5) years David

20 Amended Requirements Contract Type??
The Statement of Work requests the Offerors to propose the relevant staffing in order to provide a deliverable to the Department. In pertinent part, the SOW is defined in 3 parts: Market Review: Contractor shall assess the market in the office furniture, widget manufacturing, and construction equipment service commodity areas to assess what companies are qualified to do work with the Government and provide their products to the US Air Force installation in Belize. This assessment shall be conducted based on, Attachment A, titled “Department X’s Comprehensive Potential Offeror List, ” Market Interest: Survey the identified companies to assess their capabilities, past performance, financial capacity, and interest in doing business with the Government. Market Assessment Report: Contractor shall provide a report of its findings to the Department within 4 weeks of award. The report shall identify ten (10) companies per commodity area. The report shall be issued electronically in the Microsoft Word format. The report shall identify: Current Government Standing Past Performance to include three (3) projects completed within the commodity area being assessed within the past five (5) years Experience providing services to Belize Interest doing work with the Department Firm requirements Low technical risks Qualified suppliers Financial capability to absorb overruns Motivation to continue David Contract Type??

21 Definition Equals Dollars
Pricing without firm requirements Pricing with firm requirements David

22 Why Such a Drastic Difference?
Without clearly defining the requirements, Industry does not know what the Government truly needs Depth of the requirement (commodity areas)? Specialized expertise requirement (Trade Off) vs. Data provided by the Government (LPTA)? Quantity of results? And when Industry does not know, it prices based on the worst case scenario (scare money) Assumption of the highest reasonable number of commodity areas Assumption that specialized experience will be required Assumption of the highest reasonable number of results David’s notes…. After facilitating the first two bullets, David will transition the discussion question at the bottom of the slide to John. John will facilitate a discussion around the fact that in an era of sequestration and contractors being hyper-competitive to win work, many contractors back into the numbers for FFP contracts regardless of the risk, which again brings into question how sustainable this approach is especially for small businesses that cannot afford to absorb losses as easily as large contractors. Discuss motivation to continue and also if the contracting officer mandates a certain methodology or contract type they are forcing small businesses to accept the risk and beg for mods/change orders down the line, which will likely strain the government/contractor relationship. All of this goes against the industry/government collaboration that the BBP 2.0 promotes. John to Transition back to Bryan. Alternatively, what are some of the long-term impacts if the government insists on issuing a FFP contract for vague requirements and industry is forced to propose within a certain IGCE?

23 Summary Wrap-up Q & A Session
Evolution of the Better Buying Power (BBP) Initiatives Ensuring “Best Value” Selecting the Appropriate Methodology Employing Appropriate Contract Types Q & A Session As we are nearing the end of today’s training session, let’s quickly review some of the key take-aways: Defining “value” in Best Value Defining “technically acceptable” in LPTA Contract Type appropriate to the situation Emphasis on Industry/Government collaboration BBP2: New approaches, but the same aim, to defense acquisition as 2010’s Better Buying Power initiative. As Mr Kendall has stated: give troops fighting the nation’s wars the best equipment, and to get good value for every taxpayer dollar. Incorporate lessons-learned since 2010 when it rolls out the final version of Better Buying Power 2.0 early in 2013 There are hundreds of examples of Defense Department acquisition executives putting the Better Buying Power principles into practice. Our challenge is to keep it going.

24 For Additional Information
Training modules that DAU built for BBP 1.0 can be found here: https://acc.dau.mil/CommunityBrowser.aspx?id=491858 Here’s the website for the BBP 1.0 modules: https://acc.dau.mil/bbptraining This site also has a link to the SLAT conference from last Nov on BBP (left hand border). Note: The 2.0 BBP implementation guidance is still being drafted (but not released as of today)


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