1. Examining Common Contractor Mistakes Exploring Innovative Pre-Review Solutions CPSR: Review Topics Inside and Outside The Procurement File

2. Introductions Your Instructor Founder of and Lead Consultant for ProcureLinx LLC Creator of ProcureLinx Pro™ Web-Enabled CPRS Solution Former … Subject Matter Expert, Federal Procurement Compliance General and Corporate Counsel Director of Compliance Director of Purchasing Sub/Contracts Administrator

3. Introductions Overview – What Will We Cover? What is a CPSR? Recent Changes in the CPSR Process and Environment Four Common “File” Findings and Remedies Three Common “Enterprise” Findings and Remedies

4. Introductions What is a CPSR? A Contractor Purchasing System Review (CPSR) is a comprehensive review of a contractor’s enterprise system for purchasing goods and services on the open market for performance under certain types of contracts issued under the authority of FAR Part 15 by agencies of the federal government.

5. CPSR Background FAR 44.3 and DFARS 252.244-7001 outline and enable the Contractor Purchasing System Review Process ($25M+ in annual revenue) Early on, DCMA reviewed “Major Contractor Systems” with DCAA reviewing smaller contractor systems. DCMA was given sole authority to perform CPSRs in Feb 2012 5

6. Introductions What Happens During a CPSR? (FAR 44.303) DCMA reviews three (3) main aspects of Contractor Purchasing Systems: Purchasing/Procurement Manual (How You Say You Manage the Supply Chain) Procurement Files (How You Actually Manage the Supply Chain) Enterprise-Wide Supply Chain Management Initiatives (How Your System is Administered and Maintained) These are Government Deliverables Subject to Inspection and Acceptance

7. The Process Impact of a CPSR [FAR 52.244-2] DCMA Acceptance of System Deliverables Means: No “Significant Deficiencies” Elimination/Significantly Reduction of AN&C Higher Win Rate on Contracts Lower Cost / Higher Effective Fee Ability to bid on Contracts requiring an approved system 7

8. The Process Impact of a CPSR [DFARS 252.242-7005(d)] DCMA Rejection of System Deliverables Means: One or More “Significant Deficiencies” Significant Oversight and Monitoring (AN&C; Repeat CPSRs; Quarterly Reports) Preliminary Disqualification from Bidding on Prime Contracts 5-10% Withhold on Payments Due under DoD Prime Contracts ACO advance consent or approval could cause significant delays in meeting customer requirements 8

9. Previous CPSR Environment (Prior to 2009) CPSRs were a collaborative process between CPSR Team Leads and Contractors. The Selection of CPSR Team Leads based on geographic placement led to long-standing relationships between DCMA and Contractors. Generally 1-2 person CPSR Teams performed onsite reviews for 1-2 weeks (depending on contractor size) with final reports within 30 days after conclusion of review. 75-92% of Contractors failed their CPSR if reviews were not completed within 5 years from last review. 9

10. Current CPSR Environment (Post 2009) CPSR Teams are rotated amongst all DCMA Branch Offices. Generally 2-4 person CPSR Teams performing onsite reviews for at least two weeks with occasional participation of DCAA (cost/price analysis) CPSR Team findings are evaluated by a Review Board. Contractors currently wait as long as 13 months for final reports. >98% of Contractors failed their CPSR if reviews were not completed within 5 years of their last review. 10

11. Current Environment What Has Changed In The Last Three Years? JAN 2009: Senate Committee on Wartime Contracting Created 2009: Senate Committee on Wartime Contracting Interim Commission Report 2010: Jean Labadini Named New CPSR Director 2010-2011: Public Laws Revised and Tightened; CPSR Environment Changes … FEB 2012: DFARS 252.242.7005 Enacted FEB-JUNE 2012: Lockheed Martin Hit With 2-5% Withhold on the F-35 Program AUG 2012: Jean Labadini Retires; New Acting CPSR Director …

12. Introductions Incredibly Common File Findings What Is DCMA “Finding” During CPSRs? Lack of Competition Inadequate/Insufficient Price Analysis “Missing” File Documentation (That Cause Public Law Trouble) (Inadequate Process for Awarding Other Than FFP Subcontracts)

13. First File Finding: Competition DCMA expects 60-70% competitive procurements. Manufacturing Contractors average 40-70% Service Contractors average 3-25% Lack of Competition Can Lead to Several Additional Findings Price Analysis – Why? Insufficient Noncompetitive Justifications Lead Time Usurpation of Procurement Authority

14. First File Finding: Competition How does DCMA define Competition During a CPSR? ADEQUATE PRICE COMPETITION WHY? FAR 6.3 vs. 52.244-5 FAR Part 6 and CICA FAR 52.244-5 Limitations on Competition

15. First File Finding: Competition Result of Application of 52.244-5 as Competition Metric: Technical “Competition” Without Price Competition PROCUREMENT IS CONSIDERED NONCOMPETITIVE No Technical “Competition” With Price Competition PROCUREMENT IS CONSIDERED COMPETITIVE

16. First File Finding: Competition How Does This Concept Impact Your Procurements? 1. ID/IQ Teams Negotiated Against Target Rates Subcontractor Rates are Compared to Contractor “Target Rate” Developed as an Estimated “Price to Win” Price Analysis – 15.404-1(b)(2)(v) (Noncompetitive) All Team Member Subcontract Rates analyzed using this technique will likely be determined Noncompetitive Awards by CPSR Team

17. First File Finding: Competition What’s the Remedy? Incorporate Target Rates Into A Competitive Rate Analysis If Target Rate Lower Than Range – “Competitive Plus” Analysis If Target Rate Within Range – Pre-Negotiation Position Target Rate Higher Than Range?

18. First File Finding: Competition 2. Noncompetitive SME Procurements Subcontractor Selected on Noncompetitive Basis Per COTR “Direction” Check the Source Justification “Customer Direction,” “Only Contractor Qualified,” “Expert Services” No/Weak Market Research

19. First File Finding: Competition How Do You Fix it? Best Value / Technical Trade-Off Procurement Develop the SOW based on Customer Requirements Source Amongst Technically Qualified Offerors Valid “No Bid” Evaluating Technical Qualifications vs. Price – What Constitutes a “Substantial Factor?” Best Value or LPTA w PQ?

20. First File Finding: Competition 3. “ Noncompetitive” Part Procurements Parts Sourced Without “Functional Equivalent” Option Provided to Offerors FAR 6.302-1(c) says this is Noncompetitive Procurement So What? Compete in accordance with 52.244-5 and Get Credit for a Competitive Procurement During Your CPSR

21. Second File Finding: Price Analysis Often Accompanies “Lack of Competition” Finding Where Does the “Price Analysis Requirement” Come From? Why is it SO IMPORTANT? What is DCMA Looking For? Correct Use of Price Analysis Technique Detailed Narrative Analysis NOT Justification Effective Negotiations

22. The Mathematics of Price Analysis The Price Analysis Algorithm

23. Just A Little Bit of Algebra … Okay … So What Do Those Letters Mean? Input (Subcontractor Proposal) Constant (Evaluation Criteria) Dependent Variable (Delta)

24. Learning to Love Algorithms Hold On … How the @$#*& Does This Work?

25. Learning to Love Algorithms … You Didn’t Even Know You Were Doing Algebra, Did You?

26. Price Analysis Requirements “Tell the Story” by Including the Following: Summary Background of the Procurement Summary of Analysis Technique and Selection Process Narrative Description of Basis of Comparison Bid / Comparison Matrix (SHOW YOUR WORK) Conclusion (F&R / Subject to Further Negotiation)

27. Climbing the Decision Tree The FAR Provides Criteria: 15.404-1(b)(2) Criteria is Prioritized [15.404-1(b)(3)] Decision Tree vs. Checklist Why It Matters

28. Price Analysis vs. Price Justification Price Justifications are not permitted by the FAR, DCMA or DCAA. What is a Justification? During a Justification, the Price Proposed is Accepted Before the Evaluation is Performed. As a result, Fair and Reasonable Pricing Has Not Been Established.

29. A Little More Algebra … The Price Justification Algorithm

30. A Little Bit More Algebra … Okay … So What Do THOSE Letters Mean? Input (Subcontractor Proposal) Dependent Variable (Evaluation Criteria) A Constant Is Not Included In Equation

31. Negotiations What Happens when Z > 1.0 A Negotiation Accomplishes One of Two Primary Goals: Downward Adjustment of Subcontractor Proposal (X N )to Conform with Original Evaluation Criteria (Y) and/or Establishment and Documentary Support for Adjustment(s) to Original Evaluation Criteria (Y N )

32. The Mathematics of Negotiations The Negotiation Algorithms

33. Just A Little Bit (More) Algebra … Negotiated Subcontractor Rate Constant (Evaluation Criteria / Pre- Negotiation Position) Subcontractor Rate Negotiated Criteria

34. Third File Finding: “Missing” Compliance Documentation Centralized Representations and Certifications Contractor Reasoning: Streamlined Files CPSR Risk: CPSR Team does not look “outside of the file” Effect: 4+ Public Law Violations Debarment Cert Anti-Lobbying Act Anti-Kickback Act CAS Certification

35. Third File Finding: “Missing” Compliance Documentation “Common Sense” Determinations of Commerciality Contractor Reasoning: Reduction of Duplicative Documentation – Do obviously COTS items REALLY need it? CPSR Risk: ANY Procurement Decision requires documentation. Obvious Equals Easy, Not Nothing. Effect: Public Law and Regulatory Violations CAS TINA Small Business Subcontracting Plan Foreign Subcontractor Notice

36. Bonus Finding: Awarding Other-Than-FFP Subcontracts Where Did The Increased Emphasis on Award of Other-Than- FFP Subcontracts Come From? Fraud, Waste and Abuse Investigations Public Law (52.244-2) DCAA What Do You Need to Know?

37. Questions? Conclusion of Part One

38. Introduction Surprisingly Sneaky Enterprise Findings What Does DCMA Expect From Your Enterprise System? Appropriate Organizational Structure and Authority Matrix Adequate Lead Time Accurate Data Call Responses

39. First Enterprise Finding: Organizational Structure / Signature Authority What Does DCMA Expect From Your Org Structure? The Procurement Structure Must Retain Structural Integrity and Autonomy Organizational Structure Protects Autonomy Question – Can An Operational Employee Fire a Procurement Professional Without Oversight?

40. First Enterprise Finding: Organizational Structure / Signature Authority CCO / CFO Subcontracts Pricing Purchasing Shared Service Model Preferred

41. First Enterprise Finding: Organizational Structure / Signature Authority CCO / CFO Subcontracts Pricing Purchasing Operational Division Dotted Line Model Acceptable

42. First Enterprise Finding: Organizational Structure / Signature Authority Operational Division SubcontractsPurchasing Operational Subset Discouraged

43. First Enterprise Finding: Organizational Structure / Signature Authority How Does DCMA Review Signature Authority? Approval Chain During Requisition Process Authority Thresholds for Procurement Administration Documented Increases In Warrant

44. Second Enterprise Finding: Lead Time What Does DCMA Expect? Enterprise Average of 30 Days Per Procurement Higher the Dollar Value, the Longer the Lead Time Industry Average is 3-10 days. WHY?

45. Second Enterprise Finding: Lead Time Common Issue – “The Patchwork Approach” Contractors Use Accounting System Requisitions (ASRs) for Procurement File Requisition Requirement ASR Commits Funding; Does Not Initiate a Procurement Action 48-72 Hour Processing Goals

46. Second Enterprise Finding: Lead Time RFQ Request (Email)Bid Request/ReceiptEvaluation Award DecisionRequisitionAward ASR Model

47. Second Enterprise Finding: Lead Time Fixing “The Patchwork Approach” Replace Informal RFQ Requests With Purchasing System Requisition (PSR) Document and Capture Lead Time Add Efficiency to Requisition Process

48. Second Enterprise Finding: Lead Time PSR Bid Request/ReceiptEvaluation Award DecisionASRAward PSR Model

49. Third Enterprise Finding: Data Call Accuracy What Does DCMA Expect? Accurate, Timely, Reliable Responses to DCMA Requests for Information Effectively Include AND Exclude – Too Much Information Is a BAD THING

50. Third Enterprise Finding: Data Call Accuracy What Can Happen? Mistaken / Repeatedly Revised Data Call Responses Can Lead to a Significant System Deficiency. One Significant Deficiency Fails a Purchasing System

51. Third Enterprise Finding: Data Call Accuracy Significant Finding? How? Defense FAR Supplement (DFARS) 252.242-7005(b), “Contractor Business Systems,” provides the following definition: “‘Significant deficiency,’ in the case of a contractor business system, means a shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes.”

52. Third Enterprise Finding: Data Call Accuracy What Happens? “The Patchwork Approach” Accounting System Reports Used for Data Call Accounting System Is Not Required to Track Purchasing System Data Points Manual Edits + 1000’s Lines of Data + Tight Deadline/Panic = Mistakes

53. Third Enterprise Finding: Data Call Accuracy How to Fix “The Patchwork Approach” Track Purchasing System Data Points In Accounting System Revise PO/Subcontract Numbering Process Track PSRs

54. Questions? Conclusion of Part Two

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