The Coalition for Government Procurement

The latest developments under the Federal Strategic Sourcing Initiative (FSSI) include a move away from the GSA Multiple Award Schedule (MAS) program.  The Office Supply 3 (OS3) FSSI procurement would establish a new set of indefinite quantity-indefinite delivery (IDIQ) contracts for office supply companies.  The new IDIQ contracts, although separate from the MAS program, would essentially duplicate pre-existing MAS contracts for office supplies.  It is contract duplication that will increase costs for companies and create confusion in the federal marketplace.  The costs and confusion associated with this duplication will negatively impact customer agencies and contractors, especially small business contractors. On December 9, the Coalition submitted comments on the OS3 solicitation to GSA.  The comment can be found here.

Our comments reflect significant and legitimate questions and concerns regarding the acquisition/logistic strategies for OS3.  We look forward to discussion with GSA on these matters.  At its core, the current government-wide, one size fits all strategic sourcing approach misses the “full services” mark.  It does not recognize the importance of clear, consistent and firm customer requirements.  In essence, the closer the procurement is to the requirements holder the more likely the resulting contract will provide a best value outcome for customer and the contractors of all sizes.  That is why the Coalition has endorsed the use of agency specific Blanket Purchase Agreements (BPAs) that leverage agency requirements to deliver best value outcomes.  Agency specific BPAs provide a more effective, efficient and competitive alternative to the generic government-wide BPAs now being put in place through FSSI.  It will also ensure a long term, vibrant supply chain for the federal government—a supply chain that continues to include companies across all socio-economic categories.

It is time for a “time out” review of the current strategic sourcing strategy.  As part of the time out, GSA should release all studies, reports and/or analysis regarding savings, calculations for these savings, as well as the costs associated with the current FSSI.  Such a release would be consistent with the Administration’s laudable focus on transparency in government.  The release of this information should be the first step towards a fulsome, thoughtful and engaging strategic sourcing dialogue among all stakeholders.  The Coalition looks forward to continuing the dialogue on strategic sourcing informed by the release and review of all FSSI studies, reports and analysis.

Welcome back!  I hope you all had a wonderful Thanksgiving!    As the end of the year approaches, it is time to finish the “Thirteen Thoughts for 2013.”  On January 14th of this year, I introduced the “Thirteen Thoughts for 2013.” Throughout 2013, this blog has tackled/addressed significant procurement issues, which can be found here.   Now it is time to address “Thought No. 13: Oversight of the procurement system—is there balance?”  Exploring the need for balance in the oversight of the procurement system, this blog will focus on GSA, as the central procurement agency for the federal government.

As a former government employee who often worked collaboratively with the GSA Inspector General’s Office (IG), I understand and appreciate the vital role the IG plays in addressing risk management in our procurement system.  Oversight and risk, however, must be balanced.  There is a tolerable level of risk in all government and business operations.  Risk drives innovation, efficiencies, and best value solutions.  Moreover, there is an inflection point on the risk mitigation curve where the benefits of mitigation are exceeded by the costs of mitigation.  For GSA or government to eliminate every scintilla of risk (assuming it could do so) through oversight not only would increase the risk that government innovation, efficiency, competition and best value solutions would grind to a halt, but also would simply transform risk costs into oversight costs.

Clearly, oversight is necessary; it is vital to ensuring integrity in our system.  The question is finding the right balance that maximizes value delivered to customer agencies and the American people through our procurement system.   A key to that balance is the vital, positive role played by contracting managers in procurement operations.

Contracting manager leadership is a key to ensuring open, balanced communication between all stakeholders throughout the procurement process.  Communication is vital to maximizing best value outcomes for all.  It is what the Myth-Busters campaign is all about.  The risk to communication is why a recent GSA FAS instructional letter issued by the FAS Office of Acquisition Management and the recent IG audit of management intervention are of such concern.  Stay with me now–here are the particulars.

On May 6, 2013, the Office of Acquisition Management issued FAS Instructional Letter 2014-04entitled “Contracting Officer Responsibilities Pursuant to GSA Office of Inspector Contract Audits” (the instructional letter).  The instructional letter (publically availablehere) provides guidance on audit procedures, specifically the responsibilities of the contracting officer concerning GSA IG audits. The drafting of instructional letters is typically a collaborative effort involving all GSA internal stakeholders.   The instructional letter guidance includes a series of questions and answers on key issues.

Although the instructional letter provides several positive statements regarding contracting officer discretion when utilizing the audits in negotiating pricing for MAS contracts, it also includes a question and answer regarding the right of the IG auditors to escalate issues to the appropriate agency officials when the contracting officer disagrees with the audit findings.   Here is the instructional letter’s question and answer No 7:

Q7.  What can the auditor do if I [i.e. the contracting officer] disagree with the report finding(s)?

A7. The RIGA [the Regional Inspector General for Auditing], if in disagreement with the CO’s final position or the original 60-day CO’s response, retains the right to escalate the issues to the appropriate agency officials.  The RIGA shall notify the Assistant Inspector General for Auditing (AIGA) or designee, who will initiate contact with the appropriate agency officials to resolve the issues.  Furthermore, the auditor may request to the CO and/or appropriate agency officials that actions be temporarily suspended in order to discuss the differences.

On June 4, 2013, the GSA IG issued Report Number A120161/Q/6/P13003, Improper Management Intervention in Multiple Award Schedule Contracts, Federal Supply Schedule 70-Information Technology Contracts, Federal Acquisition Service.   The report included the following recommendation:

The Commissioner, Federal Acquisition Service, should:

  1. Ensure that the contracting process is independent and free from FAS management interference due to contractor pressure.  These steps should include:
    1. Requiring FAS management not to intervene in contracting actions in response to requests from contractors except for instances of misconduct or other serious administrative issues;
    2. Requiring FAS management to fully document all conversations and correspondence with contractor officials regarding specific contracts and offers, to include such information as date, time, participants and specific details of information exchanged; and
    3. Issuing a memorandum expressing support for contracting staff making independent determinations, including decisions not to award contracts or contract extensions.

In response to the audit and its recommendations, a multi-association letter was sent to GSA raising concerns regarding the appropriate role of senior management in the day-to-day operations of the MAS program.  The letter can be found here.  Simply put, it is a question of balance.  Managers of a procurement operation, like the MAS program, must be able to hear from all stakeholders, including the IG and contractors, regarding issues surrounding the negotiation of contracts.  These managers also should feel empowered to find innovative approaches to assure that best value solutions are available through GSA.  To do otherwise would be to abdicate leadership of the program.

Unfortunately, the instructional letter and the IG audit, standing alone as the only public guidance/positions on the role of the contracting manager, make clear a current limited communications role for managers.  The key management role of ensuring balance between oversight and operation is out of balance!  Unfortunately, to date, there has been no written response to the multi-association letter.  All in industry would value further positive communication from GSA leadership regarding the role of contracting managers.

Happy Thanksgiving!

November 26th, 2013

Thanksgiving is one of my favorite holidays. The big turkey dinner followed up with NFL football (as one of several thousand shareholders, I will be cheering on the Green Bay Packers this Thursday!). However, over the years I have come to appreciate the thanks in Thanksgiving. Thanks for my family and my friends. Thanks for my home. Thanks for my job—it is so much fun and so meaningful.

At this special time we must also give thanks for all those who go in harm’s way to protect us, our service men and women, civil servants and contractor personnel. Please keep them in your thoughts and prayers. Please also keep families of all our fallen in your prayers.

Although we live in challenging times, I am confident we will overcome our present difficulties. We have done it before. With that in mind, I wanted to share with you Abraham Lincoln’s famous Thanksgiving Day Proclamation. The October 3, 1863 Presidential Proclamation called on the nation to observe the last Thursday in November as a day of Thanksgiving. Issued at the height of our greatest crisis, the Civil War, it still has meaning today.

A Proclamation

The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God.

In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union.

Needful diversions of wealth and of strength from the fields of peaceful industry to the national defense have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consciousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom.

No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy.

It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquility and Union.

In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.

Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the United States the Eighty-eighth.

By the President: Abraham Lincoln

Happy Thanksgiving to all FAR and Beyond Blog readers!

This week’s comment was to focus on five steps to improve requirements development and procurement outcomes for the American people.  It will have to wait till December.  A recent article in Federal Times entitled “GSA exploring cost-reimbursable option to Supply Schedule” has drawn me back, like a moth to a flame, to other direct costs (ODCs) and the Multiple Award Schedule program.

According to the article, FAS Commissioner Tom Sharpe stated to Federal Times that GSA is exploring adding a cost-reimbursement contract option to the MAS program.  The Coalition appreciates and supports GSA examining all options that may further support customer agency needs through pre-existing government-wide contract vehicles.  We look forward to the dialogue with GSA as it explores the business and procurement policy case regarding cost-reimbursement schedule contracts.

At the same time, GSA has a “low hanging fruit” opportunity to reduce contract duplication and total acquisition costs across the federal enterprise by authorizing customer agencies to utilize the Federal Acquisition Regulation (FAR) based commercial item clause for ODCs.   The FAR-based clause, 52.212-4, Alternate I, already authorizes a contract mechanism for competing, acquiring and reimbursing contractors, at the order level, for ODCs, materials and indirect clauses.  FAR 52.212-1, Alternate I went through the ruling making process over five years ago.  So today there is a clause (52.212-4, Alternate I) that can immediately serve customer agencies by increasing competition through the MAS program for best value commercial solutions.   Increasing MAS competition, capability and efficiency for the acquisition of commercial solutions will reduce contract duplication!  Agencies will not have to create their own contract vehicles when the MAS program can meet their requirements.

At GSA’s request, the Coalition prepared a White Paper addressing the implementation of ODCs on MAS contracts.  The paper can be found here.  The roadmap is there and we look forward to GSA adding this cost saving contracting capability to the MAS program.  After all, ODCs will benefit customer agencies and the American people by providing a more capable, robust and competitive MAS program.  It is a win-win for all.  It is time to pick the low hanging fruit!

Roger Waldron

President

 

Earlier this week the Government Accountability Office (GAO) testified before the House Oversight and Government Reform Committee regarding “Leveraging Best Practices to Help Ensure Successful Major Acquisitions.”   The testimony can be found here.  The focus of the testimony was a presentation of nine common “critical success factors” that GAO identified in examining seven successful federal information technology procurements.   As GAO explains in its testimony, agency officials from the seven successful procurement investments identified nine common factors that were critical to the success of three or more of the seven investments.   The nine common factors and number of agencies reporting the factors are as follows:

gao

These seven factors are standard commercial best practices.  As this blog has repeatedly noted, requirements development is the “blocking and tackling” of procurement.  As “blocking and tackling” are the keys to winning football, sound requirements development is the key to ensuring best value outcomes for information technology investments on behalf of the American people.  It is the foundation for success in ensuring best value outcomes Commercial firms focus significant management time, effort and technical resources on ensuring sound requirements development when seeking to acquire information technology solutions.

Sound requirements development is the foundation for all procurement and contract performance success both in the private sector and the federal sector.  The keys to sound requirements development are the seven critical success factors (i.e. commercial best practices) identified by GAO.  Most importantly, these factors have remained consistent over time!  Once again, as  the Services Acquisition Reform Act (SARA) 2007 Acquisition Advisory Panel Report observed regarding best commercial practices:

Commercial organizations invest the time and resources necessary to understand and define their requirements.  They use multi-disciplinary teams to plan their requirements, conduct competitions forward, and monitor contract performance.  They rely on well-define requirements and competitive awards to reduce prices and obtain innovative, high quality goods and services.  Procurements with clear requirements are far more likely to meet customer needs and be successful in execution.

See page 31, Chapter 1, of the Report.

As noted in my October 25th FAR and Beyond blog, in response to the above finding the SARA Panel recommended that:

Current policies mandating acquisition planning should be better enforced.  Agencies must place greater emphasis on defining requirements, structuring solicitations to facilitate competition and fixed price offers, and monitoring contract performance.  Agencies should support requirements development by developing centers of expertise in requirements analysis and development.  Agencies should then ensure that no acquisition of complex services (e.g. information technology or management) occurs without express advance approval of requirements by the program manager or user and the contracting officer, regardless of which type of acquisition vehicle is used.

This SARA Panel recommendation essentially mirrors the seven factors that GAO identified.  The recommendation essentially translates commercial best practices into a federal procurement context.  To improve procurement outcomes for information technology solutions  the federal government must demonstrate the determination, discipline, and drive to address the fundamentals of requirements development!

Great job GAO!  Next week—five steps toward improving requirements development and procurement outcomes for the American people.

Roger Waldron

President

As you know, the GSA Multiple Award Schedule program and the IT GWACs (GSA, NASA and NIH) are strategic platforms that leverage the government’s acquisition resources through streamlined competitions for customer agency requirements.  In essence, GSA is a federal procurement market marker.  GSA is not a government-wide requirements holder.  What does that mean?  Well, at its best, GSA provides customer agencies and contractors with an efficient, effective government-wide framework for conducting business.       

Understanding, communicating and competing requirements is the key to saving taxpayer money.  As this blog has noted many times, requirements development is the “blocking and tackling” of government procurement.  Sound requirements development is vital to best value outcomes.  Moreover, the closer a procurement is to the actual requirements holder, the better opportunity for clear, consistent requirements with corresponding volume commitments.  Again, clear, consistent requirements and volume commitments drive competition and savings.

That is why the Office of Federal Procurement Policy’s (OFPP’s) current approach to strategic sourcing is troubling.  Rather than empowering customer agencies to articulate, communicate and compete their specific requirements through agency specific BPAs under GSA’s MAS program, OFPP is pursuing a strategy of establishing government-wide BPAs theoretically covering multiple agency requirements.  These government-wide BPAs are extremely broad, overly complex and include significant data reporting requirements beyond standard commercial practice.  But fundamentally, these BPAs lack clear, consistent requirements and volume commitments.

A case in point is the GSA’s current Request for Quotes (RFQ) seeking to establish government-wide FSSI BPAs for “Janitorial and Sanitation Commodities (JanSan).”  The terms of the RFQ are, at best, confusing if not troubling.  The RFQ’s “Notes to Contractors” state in part that “[t]he total spend opportunity addressable through this solicitation is estimated to be more than $599 million annually.” The notes subsequently refer to an Attachment 5 for the various department and agency commitment letters.    See page 2 of the RFQ.  In addition the RFQ’s Attachment 6 – Participating Agencies’ Spend, lists 10 departments/agencies annual spend on janitorial and sanitation supplies.

The disparity between Attachment 5 and Attachment 6 is very instructive with regard to the role of requirements.  All the commitment letters in Attachment 5, save one, are written as “conditional commitments” to use the resulting BPAs.    For example, the Department of the Army’s commitment letter states in part that it will “conditionally commit to use the Federal Strategic Sourcing Initiative (FSSI) solution for our JanSan Supplies with an annual estimated spend of $1-3 million in this area.”  A conditional commitment is not a commitment!  Moreover, the Army’s conditional commitment of $1-3 million represents at most two percent of the Army’s $151.9 million annual JanSan spend as stated in Attachment 6 of the RFQ.  Similar disparities can be seen throughout the commitment letters.  The disparities, complexities and data collection costs associated with the JanSan BPAs limit competition, hurt small businesses and threaten the long term supply chain.  Interestingly, the one agency that appears to make an unequivocal commitment to the JanSan FSSI BPAs is the requirements holder closest to the procurement—GSA!

The disparity between the conditional commitment amounts and total spend by potential users of the JanSan BPAs reflect the lowest common denominator approach to the JanSan BPA requirements.  In order to include everyone—the BPA commits no one.   In response to this analysis, a knee jerk reaction could be to attempt to make the FSSI BPAs mandatory.  As I have noted previously, such an approach would be fundamentally flawed and have long term negative consequences for the competition and the supply chain—including small businesses.

The good news is that strategic sourcing can be much more competitive transparent, effective and efficient for the American people.  As noted above, GSA’s MAS program is a strategic acquisition tool that provides customer agencies with the opportunity to leverage requirements through competition for agency specific BPAs.  A more focused approach to strategic sourcing through the MAS program would eliminate generic, government-wide BPAs like JanSan and Maintenance, Repair and Operations (MRO) to the maximum extent practicable.   Alternatively, customer agencies should establish strategic sourcing BPAs based on their specific requirements, including significant volume commitments.  Specific agency requirements and volume commitments will lead to more competition, better pricing and improved efficiency.  Agencies can more clearly communicate their technical requirements, buying patterns, usage rates and locations when establishing their own BPAs.  In turn, contractors can strategically manage their support for the agency delivering better value outcomes and increased savings.  It all boils down to executing based on sound requirements.  Finally, agencies would be required to report on their savings to ensure accountability and transparency.

In sum, strategic sourcing through agency specific BPAs will increase competition, maintain the long term supply chain across the federal enterprise and increase opportunities for small businesses.  It is an approach that will be a win for the American people, customer agencies and the private sector.   After all, when it comes to requirements, who knows better what should go in the house than the homeowner!

Roger Waldron

President

The Coalition was privileged to host speakers from across the federal enterprise at the Fall Training Conference this week for a discussion of key procurement issues, challenges and opportunities of the “New Federal Market.”  Much of the discussion during both the morning plenary sessions and the afternoon breakout sessions was focused on strategies for achieving affordable, best value outcomes for customer agencies and the American people.

Affordability and best value outcomes start with sound, effective and clear customer requirements.  Sound requirements development drives superior contractor performance, pricing and value for customer agencies.  Prices paid do not in and of themselves demonstrate the cost to the government.  Prices paid must be put into context in order to assess savings and value to customer agencies.

Unfortunately, it seems that the current focus across the federal enterprise is decidedly on prices paid.  So much so that OMB is championing the development of a “prices paid portal” to collect all prices paid for products and services across the federal government.  Presumably the information collected would be used to assist contracting officers in planning and executing procurements.  Aside from the significant technical challenges involved in creating such a portal and the overwhelming amount of data that would be collected, one must ask if such a portal will truly improve decision making across the federal government.

Price alone is incomplete data.  In order to truly inform contracting personnel across government regarding market conditions—such a portal must include contract requirements, terms and conditions, and volume.  Requirements, terms and conditions, and volume are significant drivers of price and value.  Without including this information as part of the portal, price is largely misleading.  As last week’s “FAR and Beyond” blog noted, requirements development is the Achilles heel of government contracts.  Focusing on improving requirements development through the creation of centers of expertise will save millions, if not billions, of dollars while also improving contract performance outcomes!  It is a simple formula:   SOW/Requirements=Price/Value.

Next week more on requirements and strategic sourcing.

Roger Waldron

President

The questions regarding Healthcare.gov and the role the federal procurement system leads this week’s “FAR and Beyond” blog back to one of the Thirteen Thoughts for 2013:  Requirements development –the blocking and tackling of federal procurement!  Just as blocking and tackling are the fundamental keys to winning football, sound requirements development is the key to successful, best value procurement outcomes for customer agencies, contractors and the American people!

It may be too early to fully understand and/or identify the causes behind Healthcare.gov’s current challenges, especially without seeing the contract terms and conditions, including the statement of work.  But what remains true and has been true for close to two decades is that requirements development is the Achilles heel of government procurement.  Forget Low Price Technically Acceptable (LPTA) acquisition strategies, past performance databases and strategic sourcing.  The best, most effective way for the government to acquire high level, best value contractor performance in support of agency missions is through improved requirements development.  Indeed, that is one reason the current strategic sourcing approach is high risk—it focuses on complex, overly broad government-wide Blanket Purchase Agreements rather than focused, well- articulated agency specific Blanket Purchase Agreements.

To his credit, Former OFPP Administrator Dan Gordon’s Myth-Busters campaign was focused on improving requirements development through more effective communication between government and industry.  As stated in Former Administrator Gordon’s February 2, 2011 memorandum:

Access to current market information is critical for agency program managers as they define requirements and for contracting officers as they develop acquisition strategies, seek opportunities for small businesses, and negotiate contract terms.  Our industry partners are often the best source of this information, so productive interactions between federal agencies and our industry partners should be encouraged to ensure that government clearly understands the marketplace and can award a contract or order for an effective solution at a reasonable price.

Perhaps the current situation provides a teachable moment regarding our federal procurement system.  Perhaps the moment will provide the impetus for a review and reform of an overly complex system that creates unnecessary barriers to the commercial marketplace, stifles innovation, and increases costs for all.

Any such review should start with improving requirements development.  The Services Acquisition Reform Act (SARA) 2007 Acquisition Advisory Panel Report still provides a sound, effective foundation for revamping the procurement system.  As the SARA Panel Report noted in a finding on best commercial practices:

Commercial organizations invest the time and resources necessary to understand and define their requirements.  They use multi-disciplinary teams to plan their requirements, conduct competitions forward, and monitor contract performance.  They rely on well-define requirements and competitive awards to reduce prices and obtain innovative, high quality goods and services.  Procurements with clear requirements are far more likely to meet customer needs and be successful in execution.

See page 31, Chapter 1, of the Report.

In response to the above the SARA Panel recommended that:

Current policies mandating acquisition planning should be better enforced.  Agencies must place greater emphasis on defining requirements, structuring solicitations to facilitate competition and fixed price offers, and monitoring contract performance.  Agencies should support requirements development by developing centers of of expertise in requirements analysis and development.  Agencies should then ensure that no acquisition of complex services (e.g. information technology or management) occurs without express advance approval of requirements by the program manager or user and the contracting officer, regardless of which type of acquisition vehicle is used.

The SARA Panel’s recommendation remains timely and should be addressed.  Make no mistake, improving requirements development, especially with regard to information technology, will take a sustained, long term effort across the procurement community. Like blocking and tackling—requirements development is foundational, hard work that leads to success.  Let’s tackle requirements development for the American people!

Next week, more on the costs and complexities of the Federal Acquisition Regulations.  We will address how the “award price” paid will always be lower (a better value) based on the requirements.

Roger Waldron

President

Shutdown Over, Welcome Back!

October 11th, 2013

Welcome back!  With the shutdown behind us—at least for now—the procurement community can get back to the business of competing, awarding and implementing contracts that support agency missions across the nation and the world.   The impact of the shutdown is a stark symbol of how current fiscal challenges are reshaping the federal procurement marketplace.  It is also the theme of the Coalition’s 2013 Fall Training Conference:  “The New Federal Market.” 

The 2013 Fall Training Conference will be held on October 30th at the Fairview Marriott in Falls Church, Virginia, right off 495 and Route 50.  The agenda can be found here.  The agenda and confirmed speakers reflect the Coalition’s efforts over the last three years to expand its dialogue with key procurement organizations across the federal enterprise.  This year we are honored to have Frank Kendall, Under Secretary of Defense for Acquisition, Technology and Logistics and Major General Wendy M. Masiello, Director of Contracting, United States Air Force as our Keynote Speakers.  The agenda also includes officials from the Department of Homeland Security, the Department of Veterans Affairs, the Office of Management and Budget as well as the General Services Administration.  And, as always, the afternoon Myth-Busters Breakout Sessions will provide a positive forum for dialogue between procurement officials/professionals from government and industry.

During the conference luncheon the Coalition will be presenting the 2013 Excellence in Partnership (EIPs) Recognitions to 12 individuals and/or organizations including the Lifetime Acquisition Excellence Award to Dr. Nick Nayak, Chief Procurement Officer, Department of Homeland Security.  A list of the honorees can be found  in the EIP recognitions announcement below.  Our EIP luncheon speaker is the always thought-provoking Steve Schooner, Nash & Cibinic Professor of Government Procurement Law and Co-Director of the Government Procurement Law Program at The George Washington University Law School.

The conference provides a wonderful forum for the procurement community to participate in a conversation focusing on key procurement issues, challenges and opportunities!  It is a unique Myth-Busters opportunity for contracting officers, contract and program managers, compliance professionals, in-house counsel, business development and financial officers from across government and industry.

You can register here for the 2013 Fall Training Conference: “The New Federal Market.”  We look forward to seeing you on the 30th!

Roger Waldron

President

Legal Corner

By: Elizabeth Ferrell, Partner, McKenna Long & Aldridge LLP, Thomas Lemmer, Partner, McKenna Long & Aldridge LLP, and Tyson Bareis, Associate, McKenna Long & Aldridge LLP

With the recent shutdown caused by failure to enact a Continuing Resolution funding the government for the start of FY2014, contractors are understandably wary of Congress’ ability to reach an agreement on raising the debt ceiling. If the debt ceiling is not raised, and the US Treasury cannot meet all of the United States’ financial obligations when they become due, government contractors are likely to be among those adversely affected. This Client Alert focuses on what could happen if the Government does not raise the debt ceiling and how contractors can prepare for this possible circumstance.

The Federal Debt Ceiling

The national debt is the total amount of money borrowed by the Government to fulfill the financial obligations imposed by past Congresses and past Administrations. A statutory debt limit (presently codified at 31 USC 3101) has restricted the total federal debt since 1917. Most recently, the federal debt ceiling has been raised to $16.699 trillion (Pub. L. 113-3 (February 4, 2013)). In the history of the United States, Congress has never failed to raise the debt limit when necessary. As a result of various fiscal measures implemented by Treasury Secretary Jacob J. Lew, Treasury’s ability to meet all US financial obligations will continue through October 17, 2013.

The ability to borrow and issue new debt instruments is central to the Treasury Department’s cash management systems and ability to handle the daily fluctuations between revenue flowing into the Treasury and outlays from it. When the debt limit is reached, Treasury’s borrowing authority ends, so the Department cannot issue new debt to manage cash flow or to pay interest on the federal deficit. As a result, the Government cannot pay its bills or invest surpluses which may accumulate in various trust funds as required by law.

A Government default on financial obligations resulting from a failure to raise the debt ceiling is different from a Government shutdown that results from the failure of Congress to pass appropriations legislation. A shutdown occurs because the Government may not incur new financial obligations in the absence of appropriations without violating the Anti-Deficiency Act. A default means that the Government cannot pay financial obligations that have already been incurred. Raising the debt ceiling is not about the availability of funds; it is about managing cash flow.

If the debt ceiling is not raised and default occurs, the Department of the Treasury will prioritize and decide which outstanding financial obligations are paid and in what order. The Treasury Department has no legal requirement to pay obligations in the order in which they were received and may choose to make payments “in any order it finds will best serve the interests of the United States.” Comp. Gen. B-138524 (Oct. 9, 1985). Most experts believe that in this event, Treasury will use available funds to first pay interest on outstanding debt and entitlement obligations, although Secretary Lew has not said what he will do and has cautioned that “any plan to prioritize some payments over others is simply default by another name.”

Impact on Government Contractors

If the Treasury lacks funds to meet all the United States’ financial commitments, it is likely that some payments to government contractors will be delayed or deferred, including payments for invoices for work that has been completed or for delivered goods, progress payments, contract financing payments, and other payments, such as those for lease or settlement agreements. Contractors should anticipate a disruption in cash flow.

It is important to note that the failure to raise the debt ceiling does not affect the ability of the Government to obligate funds for a contract so long as sufficient appropriations exist. Generally, contractors should continue to perform within the limits of obligated funding, with the expectation that payment will be delayed. Under the standard Limitation of Funds, Limitation of Costs and Limitation of Government Obligation clauses (FAR 52.232-20-22), the Government is not required to pay more than the funded amount, and the contractor is not obligated to incur costs or continue performance in excess of funding.

In certain circumstances, the Government’s failure to pay can amount to a material breach of contract which would entitle the contractor to stop work. Whether or not a contractor has a duty to proceed with performance under the contract or may stop work upon a material breach by the Government often depends upon which of two alternative disputes clauses is in the contract. SeeFAR 52.233-1; 52.233-1, Alt. 1. Any decision to stop work for nonpayment by the Government should only be undertaken after close review of the materiality of the breach and the pertinent FAR clauses in the contract. Contractors should expect that the Government will challenge any decision to stop work and may decide that a termination for default is appropriate. It is important to note that in extreme cases, inadequate or late payments may put a contractor in a position in which it simply cannot continue performance. In such circumstances, a default may be excused if the contractor can show a nexus between the failure to perform and the Government’s failure to pay.

The good news is that contractors may be entitled to interest for delayed payments under the Prompt Payment Act (Pub. L. 97-177; FAR Subpart 32.9; 5 CFR 1315)(“PPA”). The PPA applies to invoice payments so long as contract performance is satisfactory, and the invoice contains certain required information. The PPA does not apply to contract financing payments. If payment is late, FAR 32.907(f) specifically provides that “[t]he temporary unavailability of funds to make timely payment does not relieve an agency from the obligation to pay interest penalties.” The PPA interest rate is set by the Treasury Department, and the current rate is 1.75 percent per annum (78 Fed. Reg. 38811, 39063 (June 28, 2013)) .

A prime contractor’s obligation to pay subcontractors depends on the terms of the subcontract. In the case of a Government default in making payment, it is important for contractors to determine whether the subcontract contains a “pay-when-paid” clause and whether subcontractors may stop work in the absence of payment. Contractors may also have to consider whether the ability of small subcontractors to continue to perform may be jeopardized by cash flow disruption and whether to finance continued performance until payments resume.

In anticipation of delayed contract payments resulting from a failure to raise the debt ceiling, it is most important for contractors to take stock of existing contracts: Contractors should begin to assess the status of invoicing and contract payments. Contractors also should analyze their prime contract disputes clauses. Contractors should expect disruption of cash flow and begin now to dialogue with contracting officers and subcontractors to ensure the fewest adverse impacts from contract payment delays.

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