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Who's Incompetent - DCMA ACOs or DoD OIG Auditors?

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I just finished reading the DoDOIG audit report criticizing DCMA ACOs for failing to use cost analysis to evaluate contractor FPRPs, for failing to tailor requests for field pricing assistance so that DCAA could issue audit reports in time to meet agency-imposed deadlines, and for failing to properly document their files.

http://www.dodig.mil/pubs/documents/DODIG-2015-006.pdf

I'm finding a couple of fundamental flaws in the IG's logic about the application of FAR Part 15 to contractor FPRPs. Anybody else see what I see?

H2H

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I found this statement interesting "Regarding audit services, DCAA stated that they will complete the audit of the contractor’s forward pricing rate proposal (FPRP) in as short a timeframe as possible while meeting generally accepted government auditing standards." In other words, DCAA will conduct business as usual, i.e., move at glacial speed.

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Note 1 on page 1 says "For this review, we focused on actions taken by DCMA ACOs to establish forward pricing rates for contractor-proposed overhead costs, fringe benefit costs, and general and administrative expenses."

However, the report used a scattergun approach to recommend that DCMA incorporate all of the cost analysis techniques and procedures in FAR 15.404-1 ( c )(i) through (vi) for developing forward price rate objectives. This was an indication to me that the IG didn't really understand what those specific cost areas are composed of. There was no "focus" that I could see other than identifying the magnitude of these FPR areas. I will agree that DCMA Instruction 130 is pretty weak in identifying effective cost analysis techniques. However, the IG should have also zeroed in the the techniques applicable to the specific, stated focus of their report.

H2H, I don't know what you saw.

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Joel,

Read 15.000 which defines the scope of Part 15 requirements. Then read the 2.101 definition of "acquisition".

H2H

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Joel,

Read 15.000 which defines the scope of Part 15 requirements. Then read the 2.101 definition of "acquisition".

H2H

Not sure of your point, H2H. One must also read 15.400 Scope of Subpart (15.4), which expands the scope described in 15.000 "...for pricing negotiated prime contracts (including subcontracts) and contract modifications, including modifications to contracts awarded by sealed bidding."

See also 42.302 ( a )( 5 ) contract administration function to negotiate forward pricing rate agreements with reference to 15.407-3, which is "Forward pricing rate agreements".

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Well, maybe it's just me who is incompetent. Here's what I see.

1. DOD OIG criticized ACOs for failing to perform cost analysis on Forward Pricing Rate Proposals (FPRPs). According to the OIG auditors, because DCMA requires contractors to submit cost or pricing data in support of the FPRPs, 15.404-1(a)(3) requires cost analysis to be performed.

2. I looked at 15.000 which states that Part 15 "prescribes policies and procedures governing ... negotiated acquisitions."

3. I looked at 2.101 which defines "acquisition" as "the acquiring by contract with appropriated funds of supplies or services ... through purchase or lease...."

Since a FPRP does not use appropriated funds and does not involve adquisition of supplies or services through purchase or lease, I concluded that an FPRP is not an acquisition. Because an FPRP is not an acquisition, it is clearly not subject to the prescriptions of FAR Part 15. So I then concluded that the OIG's criticisms are ill-founded and based on a poor reading of the FAR.

Now, you say that "15.400 ... expands the scope described in 15.000." Once I get over my difficulty with a subpart having a scope outside the scope specified in the Part as a whole, I can concede your point. But I don't think the "expanded scope" of 15.400 addresses FPRPs either. The scope of 15.400 is "prescribes the cost and price negotiation policies and procedures for pricing negotiated prime contracts (including subcontracts) and contract modifications, including modifications to contracts awarded by sealed bidding." My position is that a FPRP is not a prime contract nor is it a contract modification. Again FAR 2.101 defines "contract" as a "mutually binding legal relationship obligating the seller to furnish the supplies or services ... and the buyer to pay for them. It includes all types of commitments that obligate the Government to an expenditure of appropriated funds ...." Again, when an FPRP is negotiated there is no furnishing of supples or services and no obligation of appropriated funds. So I again conclude that the OIG's criticisms of DCMA ACO's are ill-founded.

My position is reinforced when I look at 15.407-3, which states in part "All data submitted in connnection with the [FPRA] ... form a part of the total data that the offeror certifies to be accurate, complete, and current at the time of agreement on price for an initial contract or for a contract modification. ... When a forward pricing rate agreement or other advance agreement is used to price a contract action that requires a certificate [of current cost or pricing data], the certificate supporting that contract action shall cover the data supplied to support the FPRA ... and all other data supporting the action." In other words (as I see it), the cost analysis is performed on the contract action that meets the definition of "acquisition" which is within the scope of FAR Part 15. Cost analysis is NOT performed on FPRPs or other advance ageements, because they are not acquisitions and are outside the scope of the requirement to perform cost analysis.

So maybe the OIG is right and I'm wrong. I'm open to that possibility -- so please show me where my logic takes me to the wrong conclusion.

Thanks!

H2H

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I am under the impression that forward pricing rates or recommendations are used in negotiating various FFP and CR contract actions and perhaps for making certain payments under CR contracts. From page 4 of the OIG Report:

"The Glossary, DCMA Instruction 130, Forward Pricing Rates, defines a FPRR as:

[A] set of rates and factors unilaterally established by the ACO for use by the Government in negotiations or other contract actions when: ( a ) FPRA negotiations have not been completed; ( b ) when the contractor will not agree to a FPRA; ( c ) if the audit report is not consistent with a current FPRA or FPRR . . . ; or (d) as an alternative when an FPRA is not in the best interest of the Government.

In the same Instruction, DCMA defines, in part, a FPRA as:

[A] written agreement negotiated between a contractor and the Government to make certain rates, factors or other allocation methods available for use in pricing contracts, modifications, and other contractual actions that will be performed during the period covered by the agreement. The FPRA or FPRR should represent reasonable projections of specific costs that are not easily estimated, identified with or generated by a specific contract end item or task. The FPRA or FPRR could include rates for direct labor, indirect costs, general and administrative expenses, and cost of money factors."

FAR 42.1701( b ) requires that the ACO shall obtain the contractors forward pricing rate proposal and require that it includes cost or pricing data that are accurate, complete, and current as of the date of submission. When a contracting officer receives a proposal submitted with certified cost or pricing data,

FAR 15.404-1( a )(3) requires that "cost analysis shall be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data are required ...'"

In addition:

FAR 15.404-1 ( a )( 4 ) states: " Cost analysis may also be used to evaluate data other than certified cost or pricing data to determine cost reasonableness or cost realism when a fair and reasonable price cannot be determined through price analysis alone for commercial or non-commercial items."

Thus, such forward pricing arrangements are part of the negotiating process for contract actions that would specifically require or that would necessitate usin cost analysis to determine fair and reasonable rates to use in pricing the contract action.

(Sorry that I am not proficient enough on an iPad to use the WIFCON formatting for quotes, etc. that menu doesn't show up on my screen.)

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Joel,

I guess I did not convince you. So be it.

One final question: FAR 42.1701( B) requires that the contractor submit cost or pricing data in support of the FPRP. FAR 15.401-1(a)(3) mandates cost analysis "when CERTIFIED cost or pricing data are required". According to the OIG, the DCMA ACOs should have used cost analysis based on that mandatory requirement. Therefore, in the minds of the OIG auditors, certified cost or pricing data = cost or pricing data. Do you agree? If there's a difference, does that difference impact the OIG's analysis?

H2H

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Here, I'm out of time today to develop a response but just wanted to mention that we need to keep in perspective the contractors and the size of the contracts that the IG was focusing on in the Report. These are the BIG Boys and the costs involved are in the billions. I had the distinct displeasure of having to deal with one of those firms for four LONG years on two large systems contracts back when they decided to delve into fixed price construction world, which was FOREIGN to their corporate cost type contract culture. Needless to say, they failed financially on billions of dollars worth of construction contracts. However, they tried to bully their way through the mess with retired generals, who were Presidents, Vice Presidents, etc. we needed all the weapons at our disposal.

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Joel,

I guess I did not convince you. So be it.

One final question: FAR 42.1701( B) requires that the contractor submit cost or pricing data in support of the FPRP. FAR 15.401-1(a)(3) mandates cost analysis "when CERTIFIED cost or pricing data are required". According to the OIG, the DCMA ACOs should have used cost analysis based on that mandatory requirement. Therefore, in the minds of the OIG auditors, certified cost or pricing data = cost or pricing data. Do you agree? If there's a difference, does that difference impact the OIG's analysis?

H2H

Help, I don't profess to be a legal expert on "the law formerly known as TINA". But see 15.407-3 ( c ):

"Contracting officers shall not require certification at the time of agreement for data supplied in support of FPRAs or other advance agreements. When a forward pricing rate agreement or other advance agreement is used to price a contract action that requires a certificate, the certificate supporting that contract action shall cover the data supplied to support the FPRA or other advance agreement, and all other data supporting the action."

The data that support these rates, when combined with other costs in a contract action, would be certified together, when certification is necessary.

Personally, I wouldn't be able to intelligently evaluate proposed overheads, fringe benefits or G&A rates without using cost analysis techniques. Regardless of whether the data is "certified cost or pricing data" (which is to be certified at some point) or "data other than certified cost or pricing data", it would be necessary to use cost analysis techniques, in my opinion to develop a negotiation objective

With respect to your question, I believe that the FAR was revised fairly recently to define the information as either "certified cost or pricing data" or "data other than certified cost or pricing data". Without going downstairs and digging through some old FAR hard copies, I don't remember the old terms. But the term "cost or pricing data" seems to be a familiar to me. "Data other than cost or pricing data"** also seems familiar. So, cost or pricing data would be the former term for certified cost or price data.

**Edited : "Information other than cost or pricing data" was the term used.

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Here is a link to the published Final Rule that updated the terms "Information other than cost or pricing data" and references to "cost or pricing data" and added/updated definitions

http://www.regulations.gov/contentStreamer?objectId=0900006480b3e90a&disposition=attachment&contentType=pdf

FAR Case 2005-036; FAC 2005-45

Effective date 1 October 2010

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Joel,

I suspect we are talking past each other at this point. Perhaps others will consider posting their views?

Let me just say that I know about the rule and the terminology change. The rule codified the difference between "certified" cost and pricing data and non-certified cost or pricing data. Because there is a difference, my interpretation of the FAR language leads me to the conclusion that formal cost analysis is not mandatory for ACOs to use when evaluating contractors' FPRPs. That's not to say that cost analysis would not be helpful (obviously it would be) or that the ACO does not have discretion to evaluate the FPRP any way he/she would like to ... just that the DOD OIG appears to have misinterpreted the FAR and therefore criticized DCMA ACOs without justification.

That was the entirety of my point. As I said, I'm willing to be wrong but you have not convinced me that I am.

H2H

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Understand. The IG might be wrong and I don't work for DCMA. But I am familiar with the cost analysis skills or lack thereof in some of the acquisition workforce. I would tend to agree with the DOD IG report that the DCMA Instruction 30 procedures in Appendix B on page 19 are inadequate or too general in nature to properly analyze and effectively evaluate the proposed rates to determine if they are fair and reasonable.

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My question is where is the requirement stated that an FPRA must be fair and reasonable? The rates are what they are but what are they supposed to represent? FAR 42.704 tells us what billing rates are supposed to represent, i.e., reasonable approximations of final indirect cost rates. However, there is no statement in the FAR or DFARS as to what FPRs are to represent. What we are told is that they are to be used in negotiating contracts and modifications, which must be fair and reasonable, but I find no requirement that the rates covered by FPRA must be fair and reasonable which is different from a reasonable cost.

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No time - plumbing issues now require attention.

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My question is where is the requirement stated that an FPRA must be fair and reasonable? The rates are what they are but what are they supposed to represent?

First, FPRs must be "valid." See FAR 42.1701( c) and (e). They must represent what the contractor's rates really are.

Second, since they are to be used to negotiate prices, they must represent allowable costs in accordance with FAR Subpart 31.1 and 31.201-2, which means that they must represent costs that are (1) reasonable, (2) allocable, (3) consistent with applicable CAS, (4) consistent with FAR contract clauses, and (5) consistent with any limitations in FAR Subpart 31.2.

I am not clear on the distinction that you see between "reasonable cost" and "fair and reasonable." Please explain.

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Ok, plumbing temporarily under control but not my temper.

My question is where is the requirement stated that an FPRA must be fair and reasonable? The rates are what they are but what are they supposed to represent? FAR 42.704 tells us what billing rates are supposed to represent, i.e., reasonable approximations of final indirect cost rates. However, there is no statement in the FAR or DFARS as to what FPRs are to represent. What we are told is that they are to be used in negotiating contracts and modifications, which must be fair and reasonable, but I find no requirement that the rates covered by FPRA must be fair and reasonable which is different from a reasonable cost.

Is this a test or are you kidding?

How about reading the US Government Pricing Policy in 15.402, starting at ( a ).

Ok, now you should know the KO's basic responsibility concerning buying products and services at fair and reasonable prices. When forward pricing rates are used in conjunction with a pricing action it ought to be evident that the elements of pricing ought to be based upon fair and reasonable pricing, which the KO is supposed to base their negotiation objectives upon per 15.406-1 and document in the PNM per 15.406-3.

Since 15.407 discusses special pricing areas and FPRA's are a special area under 15.407-3, it should be evident that they should also be fair and reasonable. Part 42 isn't intended to provide guidance on how to negotiate fair and reasonable prices.

Back to plumbing issues.

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Vern, in regard to the distinction between a reasonable cost and a fair and reasonable price, the criteria for determining the reasonableness of a cost are found in FAR 31.201-3. For this purpose, we are talking about a specific cost and whether it meets the criteria from 31.201-3. On the other hand, a fair and reasonable price is frequently the sum of all proposed or anticipated costs plus fee or profit with their associated evaluations of risk. It can also be a market based price or one set by law or regulation. Thus, determining whether a price is fair and reasonable involves more than a determination of cost reasonableness. As stated in FAR 15.405(B) the "contracting officer’s objective is to negotiate a contract of a type and with a price providing the contractor the greatest incentive for efficient and economical performance."

Further, it is not always necessary to determine if the individual costs that may be included in a price are reasonable in order to make a determination that the price is fair and reasonable. For example, if price analysis alone is conducted, it would not be necessary to evaluate the reasonableness of each or any cost that may have been included in the price by the contractor.

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Joel, in regard to your post #17, it is not self evident that the elements that go into a negotiated price must be fair and reasonable. What is evident is that the total price must be fair and reasonable, but that does not mean that each element must be fair and reasonable also. For example, if we are looking at the situation where cost analysis is performed, and that is the situation where FPRAs would be utilized, individual elements of cost are not evaluated to determine if they are fair and reasonable. They are evaluated for allowability, which includes reasonableness. As I tried to explain to Vern, determinations of reasonableness of costs and a fair and reasonable price are different things and involve different considerations.

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