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DoD Implementation of NDAA 2012 (PL 112-81 ), Sec 808, Para ( c )(1) and ( c )(2)

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For those performing DoD services acquisition, what is the general feeling about DPAP Memo USA001973-12-DPAP, June 6, 2012 on this subject? Frankly, I am surprised at the lack of reaction in the trade press and the DoD community in general. Briefly, it seems to require mandatory pricing at the FY 2010 levels (whatever and however those are determined to be) for service contracts over $10 million, unless the head of agency waives the requirement. Furthermore, it's two key paragraphs (from the Act) seem contradictory --

(1) Unless rates are otherwise established by law, negotiation objectives for labor rates

and overhead rates not as yet formalized by the date of this deviation, for other than the

acquisition of commercial items or competitively awarded contracts or task or delivery orders

awarded to a contractor in fiscal year 2012 or 2013, shall not exceed labor rates and overhead

rates paid to the contractor for the same or similar contract services petformed under contract

with procuring DoD component in fiscal year 2010; and

(2) Any contract or task or delivery order awarded to a contractor in fiscal year 2012 or

2013 that provides for continuing services at an annual price that exceeds the annual price paid

by the DoD component concerned for the same or similar services in fiscal year 2010 shall be

approved in writing by the Secretary of the Military Department or Head of the Defense Agency

prior to contract award or order issuance.

Any thoughts out there? Thanks.

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The deviation is implementing paragraphs ( c) (1) and ( c)(2) of the NDAA for FY 12.

Paragraphs (1) and (2) are separate paragraphs. They do not conflict.

Paragraph (1) does not apply to commercial items or to competitions. It does apply only to labor rates and overhead rates not yet formalized as of 6 June 2012. There is no waiver available to the Military Dept Secretary or to the Head of a Defense Agency.

Paragraph (2) applies to "annual price", not to rates, paid for the same or similar services. It also provides for waivers by the Secretaries or by the Defense Agency Heads. Expect the waivers to be used frequently.

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I do not agree that the paragraphs do not conflict. Granted, the law and the waiver are rife with ambiguity, but the second paragraph in a plain English reading has the effect of nullifying the ostensible limitations of the first paragraph - and it is not clear that the conditions of the first paragraph apply to the second paragraph.

In any event, I agree with the statement, "Expect the waivers to be used frequently." Barring greater clarification of the law, I am sure this will be the pragmatic approach.

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Para (1) applies to labor and OH rates; para (2) to prices.

The paragraphs of the law cannot be clarified. If the 6 June memo is to be clarified, watch for something in the PGI.

In the meantime, check with your service or department rep in charge of implementing the 6 June memo.

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I realize what the two paragraphs may have intended to address - they just haven't done it in a way that makes the direction clear, or even feasible. For instance, "price" is inclusive of labor, OH, and all other cost elements in its make-up. Any natural market pressure upwards in the latter will most certainly create an increase in the former.

This is what happens wnen the attempt to lower government contracted services cost is addressed through an attempt to unnaturally reverse the natural cost progression of a free market enconomy . . . instead of, for instance, reforming program requirements.

As to checking with those in charge of implementation . . . you're talking to one of them! That's why I'm trying to sort this out!

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This is what happens wnen the attempt to lower government contracted services cost is addressed through an attempt to unnaturally reverse the natural cost progression of a free market enconomy . . . instead of, for instance, reforming program requirements.

Pseudo Milton Friedman nonsense. The policy letter simply tells COs not pay more than a certain amount for services. That is not "an attempt to unnaturally reverse the natural cost progression of the market economy." The policy does not constitute price controls. It does not force anyone to sell anything to the government at a government controlled price. It is absolutely appropriate for a big player in a market to say, "This is all I'm going to pay. No more." The question is whether the big player can make it stick.

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This presumes the scope of the services has not changed in two years and enjoys apples to apples pricing. I do not see that kind of stability in my programs. Even if it were to be apples to apples, there is a second presumption (if one is anticipating success in using the tactic) that the government market is a must-have for the services provider. Not the case in my programs. . . . or as you say, "the question is whether the big player can make it stick". Hardly a game of chance I would want to play - given the choice.

Well, so much for exchanging economic theories. I am more interested in what other practicioners may be encountering, or concluding, as they deal with this new requirement. Anyone else in the high-dollar services arena?

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(1) Unless rates are otherwise established by law, negotiation objectives for labor rates

and overhead rates not as yet formalized by the date of this deviation, for other than the

acquisition of commercial items or competitively awarded contracts or task or delivery orders

awarded to a contractor in fiscal year 2012 or 2013, shall not exceed labor rates and overhead

rates paid to the contractor for the same or similar contract services petformed under contract

with procuring DoD component in fiscal year 2010; and

(2) Any contract or task or delivery order awarded to a contractor in fiscal year 2012 or

2013 that provides for continuing services at an annual price that exceeds the annual price paid

by the DoD component concerned for the same or similar services in fiscal year 2010 shall be

approved in writing by the Secretary of the Military Department or Head of the Defense Agency

prior to contract award or order issuance.

I encourage you to re-read your excerpt with emphasis on the bolded. Since when has the DoD ever required that the only price we can agree upon is our objective position in a negotiation? Further, paragraph 1 applies to sole source situations. They are attempting to reign in costs in what they feel that they are overspending on. If I worked for a defense contractor and my boss told me that I could not accept anything below 14% profit, how is that different from what this policy does? It tells us that we cannot accept more than what the Government paid in 2010.

As far as I know, our agency is still attempting to interpret how we are going to comply. But, since you are looking for a more theoretical approach it seems, you are contradicting yourself. You claim it goes against free market economy swings in prices, and then claim you are a high dollar services buyer. Logic dictates that if you are a high dollar services provider (i.e. high demand), you would expect to see lower prices if you are buying more. Just because your negotiators aren't leveraging this to there advantage does not mean that they couldn't, especially when establishing multiple award IDIQs.

And, I'd encourage you to look at how you came up with your pricing from FY11 and FY12 from 2010, as the COL in the United States has not drastically risen, even in the DC area. Are your negotiators just using the standard, oh lets just add 3% inflation tactic? If so, you've been paying too much. The latest BLS data from the end of 2011 showed a roughly 1.6% increase in COL per year from 2009-2011, which is roughly half of what many people think is just the normal. It is their fault if they are not researching it further and just accepting it for what it is.

And, I completely disagree with your blanket statement of:

Even if it were to be apples to apples, there is a second presumption (if one is anticipating success in using the tactic) that the government market is a must-have for the services provider. Not the case in my programs.

Are you insinuating that many of these companies could do without the Government money they are getting, especially from DoD? If so, I'd really encourage you to go look at just how much the DoD spends on services each year, and then come back here and tell me how these companies would absorb that kind of blow if the Government just stopped contracting with them. This is why everyone in private industry is freaked out because of the Sequester, because it would be a drastic blow to all companies who contract with the Government, esepcially with DoD.

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I think responsible contractors have already begun to factor the economic climate into their pricing by lowering escalation significantly. If a contractor is sensitive to the Government pay freeze, they will not escalate at 3 percent. 2% currently seems reasonable to me. Agreeing to revert to older/lower LH or T&M rates and holding steady for an additional year out will mean that the contractor is agreeing to out years of declining profit. It is unlikely that a contractor would willingly agree given the funding squeeze and potential for declining revenue.

I have heard from DOD Contracting Officers that say they are instituting a contractor salary freeze for the next option period on cost reimbursable type contracts. Specifically, they have directed contractor to invoice at the same rates next period as they have in the current period. To me that seems misguided, unworkable, and contrary to the FAR.

Contractors are bound by CAS to invoice for actual costs, and if a company gave an employee a raise in January, they can't agree to invoice for that employees services at a lower rate now.

Are these KOs misunderstanding this directive? Are they merely attempting to control funding in response to the potential sequestration?

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I think responsible contractors have already begun to factor the economic climate into their pricing by lowering escalation significantly. If a contractor is sensitive to the Government pay freeze, they will not escalate at 3 percent. 2% currently seems reasonable to me. Agreeing to revert to older/lower LH or T&M rates and holding steady for an additional year out will mean that the contractor is agreeing to out years of declining profit. It is unlikely that a contractor would willingly agree given the funding squeeze and potential for declining revenue.

I have heard from DOD Contracting Officers that say they are instituting a contractor salary freeze for the next option period on cost reimbursable type contracts. Specifically, they have directed contractor to invoice at the same rates next period as they have in the current period. To me that seems misguided, unworkable, and contrary to the FAR.

Contractors are bound by CAS to invoice for actual costs, and if a company gave an employee a raise in January, they can't agree to invoice for that employees services at a lower rate now.

Are these KOs misunderstanding this directive? Are they merely attempting to control funding in response to the potential sequestration?

Unless labor and overhead rates have not been formalized as of 6 June, contracting officers are wrong if they are directing that invoiced costs in an option period cannot exceed costs for the current period. Suggest that they contact the POC for the memo.

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I guess my original point was that the NDAA and the resulting DPAP memo are attempting to "hold the line", or even "move back the line", on services contracting cost by placing cost control responsibility on the hapless contracting officer in a way that flies in the face of marketplace economic realities. The CO is obliged to set negotiation objectives at cost levels that are two years old and/or actually negotiate net, bottom line prices at two-year-old expectation levels. This is notwithstanding any actual history that may have seen costs move upward by reason of any number of factors, including Federal regulation. It is obvious that Federal price controls cannot be mandated on industry. Thus, the contracting officer is potentially put in a position of impossibility of performance - with arbitrary, roll-back price objectives in lieu of a "fair and reasonable price" that reflects reality.

Yes, I believe heads of agency will be getting quite a few requests for waiver.

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I guess my original point was that the NDAA and the resulting DPAP memo are attempting to "hold the line", or even "move back the line", on services contracting cost by placing cost control responsibility on the hapless contracting officer in a way that flies in the face of marketplace economic realities. The CO is obliged to set negotiation objectives at cost levels that are two years old and/or actually negotiate net, bottom line prices at two-year-old expectation levels. This is notwithstanding any actual history that may have seen costs move upward by reason of any number of factors, including Federal regulation. It is obvious that Federal price controls cannot be mandated on industry. Thus, the contracting officer is potentially put in a position of impossibility of performance - with arbitrary, roll-back price objectives in lieu of a "fair and reasonable price" that reflects reality.

Yes, I believe heads of agency will be getting quite a few requests for waiver.

You are wrong. To get the correct interpretation of Ginman's memo, call the POC.

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napolik:

How is he wrong?

I responded earlier today to the post by gboyle dealing with contracting officers' attempts to prevent the payment of higher labor and overhead rates during option years. Contracting officers cannot do this.

I participated in meeting with the memo's author, and I asked specifically if para (2) applies to options in current contracts. It does not.

rafieldjr rambling post in response to my post makes no sense to me. If it is supposed to address gboyle's question, it is wrong. Moreover, rafieldjr draws broad inferences about the memo's content. From what I have read and discussed about the memo, he is wrong.

The memo contains two separate paragraphs dealing with two different circumstances. It is based upon the words in statute, and in a Carter 3 June memo, which are fraught with different interpretations. Having sat in the meeting and listened to the confused interpretations of the memo, I believe any interpretation of the memo should be confirmed with DPAP prior to applying it to specific proposals or contracts.

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I think responsible contractors have already begun to factor the economic climate into their pricing by lowering escalation significantly. If a contractor is sensitive to the Government pay freeze, they will not escalate at 3 percent. 2% currently seems reasonable to me. Agreeing to revert to older/lower LH or T&M rates and holding steady for an additional year out will mean that the contractor is agreeing to out years of declining profit. It is unlikely that a contractor would willingly agree given the funding squeeze and potential for declining revenue.

I have heard from DOD Contracting Officers that say they are instituting a contractor salary freeze for the next option period on cost reimbursable type contracts. Specifically, they have directed contractor to invoice at the same rates next period as they have in the current period. To me that seems misguided, unworkable, and contrary to the FAR.

Contractors are bound by CAS to invoice for actual costs, and if a company gave an employee a raise in January, they can't agree to invoice for that employees services at a lower rate now.

Are these KOs misunderstanding this directive? Are they merely attempting to control funding in response to the potential sequestration?

The CAS do not reqjuire a contractor to invoice for actual costs. They only require a contractor to account for costs in a certain way. Whether a contractor bills for costs that are properly accounted for is a different matter. For example, overrun costs on CAS covered cost reimbursement contracts can be measured, assigned and allocated in accordance with the CAS, but the contractor cannot bill for them until and unless additional funds are added to the contract. Similarly, nothing requires a contractor to bill the government for all costs it has incurred even if it is permitted to do so under the contract.

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The memo contains two separate paragraphs dealing with two different circumstances. It is based upon the words in statute, and in a Carter 3 June memo, which are fraught with different interpretations. Having sat in the meeting and listened to the confused interpretations of the memo, I believe any interpretation of the memo should be confirmed with DPAP prior to applying it to specific proposals or contracts.

Very revealing. I don't need to hear any more than that. "DPAP -- We have a problem."

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I guess my original point was that the NDAA and the resulting DPAP memo are attempting to "hold the line", or even "move back the line", on services contracting cost by placing cost control responsibility on the hapless contracting officer in a way that flies in the face of marketplace economic realities.

I was not a participant in any discussions with the author's of either the June 3 or June 6 memos. I do recognize, however, that both memoranda equate to cost cutting measures. Simply put, DoD activities are to endeavor to spend less when it comes to contracting for services. Most of us "hapless" contracting folks should have seen such directives coming down the pike the first time the word "sequestration" was used in 2011. Why do people construe that the meaning to be ascribed is a government mandate that it will not pay anymore despite what may be a fair and reasonable price? When did re-examining needs and descoping become taboo terms? For that matter, in an economy that is barely growing and has high levels of unemployment, how does anyone continue an existing contract without thinking seriously about recompetition in lieu of exercising an option containing price escalation?

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I don't understand why the June 6 memo should cause any distress. It seems reasonably clear to me, as clear as I would want it to be. There is no way I'd ask for further clarification.

The memo contains two provisions. The first is a limitation on certain negotiation objectives, nothing else. The second requires higher level approval of any deal for a new contract or order "for continuing services" with an annual price that exceeds the annual price paid in 2010 for "the same or similar services." That's it. The memo says nothing about "waivers."

Many negotiators, as agents, must get their principal's approval of their negotiation plans and tentative agreements. That is all that the memo requires. If the agent cannot reach agreement within the principal's limits he or she passes the word up through channels and waits for instructions. What's the big deal? Real estate agents do it all the time. If they can't get the deal the buyer or seller wants, they make suggestions. A CO should be at least as competent as the average real estate agent.

In this case, the principal, DOD, is limiting the bargaining authority of its agents -- contracting officers. That is a classic negotiation tactic. When I negotiated contracts for the Air Force I asked for such limitations. They are limitations on the power to make concessions. Only a fool does not want such a limitation. The negotiator can look at the guy or gal across the table and say, "I cannot agree to pay more." What happens next depends on the respective skills of the negotiators. The memo leaves the parties free to come up with any number of solutions.

Some of the grumbling in this thread, whining, actually, is pathetic. I agree with MBRown: Times are hard and everybody has got to bite the bullet. I guess I don't find the memo bothersome because I came up during a time and in an organization when most contract prices were established through negotiation instead of competition. We were expected to solve problems and make deals, and that's what we did. When we couldn't get a deal within the limits set for us we made a plan, got it approved, and went back to the table. That's what they pay COs for.

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Guest Infoseeker

This June 6, 2012 DPAP memo is a train wreck. You do not control costs by limiting rates and prices, I think someone in the past several hundred years of government contracting would have thought of this if it made sense. You control costs by limiting the scope of the effort. There are so many problems with this concept of using rates (and prices) since 2010 (CAS being one of them as the person had stated above, funding, FPP vs Cost Type, etc). Anyone 'in the trenches' would realize the problems with this bologna are endless.

I too was surprised there has not been a large outcry in the procurement community over this. The day I became aware of this memo June 12, 2012. I thought it would have been retracted by the end of that week. I am sure once someone tries to negotiate using this bologna (especially on a FFP contract), industry will fight and win.

This memo will be retracted, it is complete nonsense. I also am confident that the two individuals within this memo (Gomersall and Ginman) will be promoted very soon for their complete lack of sense in issuing this bologna.

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This June 6, 2012 DPAP memo is a train wreck. You do not control costs by limiting rates and prices, I think someone in the past several hundred years of government contracting would have thought of this if it made sense. You control costs by limiting the scope of the effort. There are so many problems with this concept of using rates (and prices) since 2010 (CAS being one of them as the person had stated above, funding, FPP vs Cost Type, etc). Anyone 'in the trenches' would realize the problems with this bologna are endless.

I too was surprised there has not been a large outcry in the procurement community over this. The day I became aware of this memo June 12, 2012. I thought it would have been retracted by the end of that week. I am sure once someone tries to negotiate using this bologna (especially on a FFP contract), industry will fight and win.

This memo will be retracted, it is complete nonsense. I also am confident that the two individuals within this memo (Gomersall and Ginman) will be promoted very soon for their complete lack of sense in issuing this bologna.

Don't shoot the messenger!

DPAP is obligated to implement the paragraphs (c ) (1) and (c ) (2) of Section 808 of the NDAA for Fiscal Year 2012.

See http://www.wifcon.com/dodauth12/dod12_808.htm

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This June 6, 2012 DPAP memo is a train wreck. You do not control costs by limiting rates and prices, I think someone in the past several hundred years of government contracting would have thought of this if it made sense. You control costs by limiting the scope of the effort. There are so many problems with this concept of using rates (and prices) since 2010 (CAS being one of them as the person had stated above, funding, FPP vs Cost Type, etc). Anyone 'in the trenches' would realize the problems with this bologna are endless.

Infoseeker:

That is an extreme overreaction, and I'm being nice. And spare us the "in the trenches" business. That's just saying that if you are not at the working level you cannot appreciate the effect. Bull.

First, the memo does not say anything one way or another about descoping. That is left to the requiring activities and the contracting offices to decide. It simply mandates negotiation objectives. Big deal.

Second, when you are dealing with an industry and have leverage because of your size, one way to reduce your costs is to force the industry to reduce its costs. You can do that by saying that you want them to roll back their costs and prices. Bargaining will determine all outcomes. If you think that large players in the commercial sector do not do that you are out of touch.

The memo does not require that COs do anything but set certain negotiation objectives and seek approval of certain contract prices. I think that what we're seeing in this thread is the reaction of people who are used to getting prices through competition and FSS and other IDIQ contracts. COs have long been accused, with good reason, for not doing enough negotiating, and that's what we're seeing in overreactions like yours and some of the others.

And it's baloney, not "bologna."

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Disagree with your disagree 100% on all issues.

Let us see how long this bad memo takes to be retracted. It is only a matter of weeks/months because it is not in touch with reality. It was created by people who are 'not in the trenches.'

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You do not control costs by limiting rates and prices, I think someone in the past several hundred years of government contracting would have thought of this if it made sense.

This is a very interesting statement. I suppose perspective is the issue. I agree that the amount of investment needed to produce and deliver an item or service does not necessarily decrease, if the price paid for that item or service decreases. Further, I support the notion that a price ceiling might have the effect of creating shortages or deteriorated quality, while price floors might have the opposite effect. However, I read nothing in the subject memoranda that sets a ceiling on the price paid for a given service. I did not see a price control put into effect. Rather I read the implementation of a law setting a ceiling/limit on the aggregate amount available for obligation with guidance for objectives and approval levels. Nothing in this is a price control. It is a budget control (i.e., the Government may only spend up to X dollars in the aggregate) for the purchaser to follow when going to market.

Will a limit on the aggregate amount available for obligation reduce the amount available to be paid to the entire potential pool of obligees? Certainly. Will a limit on the aggregate amount available for obligation reduce the quality or quantity of services acquired? Perhaps. Then again, buyers and sellers can often arrive at creative solutions to perceived problems.

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