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here_2_help

Cost Monitoring Plans

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FAR 16-301-3(a)(4) requires that, in order to award a cost-reimbursement type contract, adequate government resources must be available to implement "appropriate government surveillance during performance ... to provide reasonable assurance that efficient methods and effective cost controls are used." I'm not 100% sure, but I believe that DCMA Instruction 123 "Cost Monitoring Plans" tells DOD CO's how to do that.

DCMA Instruction 123 (at 3.2.1.13) specifies a review of contractor cost reduction or savings initiatives. It states "The CMS shall review the contractor’s strategy for influencing and monitoring cost reductions or savings initiatives to ensure that associated cost reductions or savings are included in the forward pricing rates."

If I've missed something, please let me know. But if I've gotten it right, then here are my questions.

(1) What solicitation provision or contract clause requires the contractor to have a strategy for executing savings initiatives or cost reduction efforts? If the contractor does not have a strategy, what would prevent a contractor from simply telling the government "N/A"?

(2) Other than TINA requirements, what solicitation provision or contract clause requires a contractor to provide any information regarding its savings initiatives or cost reduction efforts to the government? In other words, assume the contractor is compliant with TINA -- i.e., accurate, complete and current information is being provided -- then what requirement compels a contractor to make an additional report to its ACO regarding such programs?

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16 minutes ago, here_2_help said:

(1) What solicitation provision or contract clause requires the contractor to have a strategy for executing savings initiatives or cost reduction efforts? If the contractor does not have a strategy, what would prevent a contractor from simply telling the government "N/A"?

(2) Other than TINA requirements, what solicitation provision or contract clause requires a contractor to provide any information regarding its savings initiatives or cost reduction efforts to the government? In other words, assume the contractor is compliant with TINA -- i.e., accurate, complete and current information is being provided -- then what requirement compels a contractor to make an additional report to its ACO regarding such programs?

(1) Don't know of any provision or clause. Nothing would prevent the contractor from telling the Government "N/A". However, take a look at 3.2.1.9:

Quote

3.2.1.9. Contractor Business Systems. The CM plan shall include the status of contractor business systems under the ACO’s cognizance. For all contractor business systems that have not been evaluated within the past 3 years, the CM plan shall include a strategy for performing current reviews and pursuing the process for approving or disapproving the systems in accordance with DFARS 242.70 (Reference (n)) and the DCMA-INST 131 (Reference (g)). This strategy should be coordinated with DCAA because contractor business systems are normally audited by DCAA (accounting system, estimating system, and material management and accounting system). The strategy should also be coordinated with appropriate DCMA specialists for the three remaining contractor business systems: earned value management system, purchasing system, and property management system.

So, it looks like the plan would be to ding a business system if the ACO didn't like your lack of a strategy. Probably estimating system.

(2) If the contractor had such information, I think it would be part of their estimating system, correct? If so, then I would go with DFARS 252.215-7002, Cost Estimating System Requirements.

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16 hours ago, here_2_help said:

(1) What solicitation provision or contract clause requires the contractor to have a strategy for executing savings initiatives or cost reduction efforts? If the contractor does not have a strategy, what would prevent a contractor from simply telling the government "N/A"?

(2) Other than TINA requirements, what solicitation provision or contract clause requires a contractor to provide any information regarding its savings initiatives or cost reduction efforts to the government? In other words, assume the contractor is compliant with TINA -- i.e., accurate, complete and current information is being provided -- then what requirement compels a contractor to make an additional report to its ACO regarding such programs?

If you are looking for an explicit contractual requirement, then I can't recall any. However, I think the idea that a contractor should have at least a notional plan/program to monitor and reduce costs is implicit in FAR 52.216-7(a)(1)'s reference to the rules for allowability in FAR Subpart 31.2. See FAR 31.201-3, Determining Reasonableness, and its references to "prudent person in the conduct of a competitive business" and "Generally accepted sound business practices...." I think that the lack of at least a notional plan/program or the refusal to describe it would affect my thinking about the reasonableness of the company's direct and indirect costs.

I would not buy an assertion that cost monitoring/reduction planning was "not applicable" to a company with a government cost-reimbursement contract, and I would have a very negative reaction to a company that took the position that they don't have to discuss the matter with the government's representative and produce some facts.

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Thanks for the replies so far ... I hope to hear from others as well.

A recent GAO report pointed to barriers that impede "non-traditional" defense contractors from entering the defense marketplace. You know the companies: Apple, Google, etc. My thought -- or half-formed assertion, if you will -- is that these types of companies aren't focused on "cost reduction." Instead, they are focused on innovation and delivering product to market. Assuming they were contracting with DOD, and an ACO requested information regarding cost-reduction initiatives, I strongly doubt the companies would (1) have anybody who could answer knowingly for the company, (2) would have anything to report, or (3) would consider developing a cost-reduction reporting bureaucracy a prudent use of company resources.

To my way of thinking, the requirement stems from a foundational assumption that contractor's products cost too much. That may well be true for mature, established defense contractors who have been in the market for decades. I strongly doubt the assumption is true for start-ups or for companies trying to enter the defense market. Those companies aren't (necessarily) focused on reducing costs, but on developing products that work. In other words, I'm thinking that the one-size-fits-all approach isn't consistent with reality.

Since I'm not feeling as if I'm necessarily on solid footing on this issue, I'm looking for input. The three replies so far have helped. As noted, I hope for more, especially from active ACOs who may have to deal with this issue.

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44 minutes ago, here_2_help said:

A recent GAO report pointed to barriers that impede "non-traditional" defense contractors from entering the defense marketplace. You know the companies: Apple, Google, etc. My thought -- or half-formed assertion, if you will -- is that these types of companies aren't focused on "cost reduction." Instead, they are focused on innovation and delivering product to market. Assuming they were contracting with DOD, and an ACO requested information regarding cost-reduction initiatives, I strongly doubt the companies would (1) have anybody who could answer knowingly for the company, (2) would have anything to report, or (3) would consider developing a cost-reduction reporting bureaucracy a prudent use of company resources.

Apple is not focused on cost reduction? See these:

"Apple Cost Reduction Strategy -- Analysis" https://www.linkedin.com/pulse/apple-cost-reduction-strategy-analysis-roberto-lecky

"Apple’s cost-cutting strategy draws ire of Chinese supply chain" https://www.cultofmac.com/442885/apple-receives-pushback-from-suppliers-over-cost-cutting/

"How Apple cuts costs in building its gadgets" http://www.cnn.com/2012/02/06/tech/gaming-gadgets/apple-supply-chain/index.html

"ISuccess: How Manufacturing Cost Reductions And Strategic Sourcing Help Apple Become The World's Most Valuable Company" http://www.strategicsourceror.com/2011/10/isuccess-how-manufacturing-cost.html

Google?

"Google Takes Stricter Approach to Costs" https://www.wsj.com/articles/google-takes-stricter-approach-to-costs-1436827885

"Google looks to cost-cutting, mobile and YouTube for the future" https://www.cnet.com/news/google-earnings-q2-2015/

"Google’s Cost Cutting Pays off with Rise in Profits" https://www.fastcompany.com/1270917/googles-cost-cutting-pays-rise-profits

"Google Inc Adopts Cost-Cutting To Fight Rising Expenses" Google cost cutting

There is no such thing as a company that doesn't focus on cost reduction. The ones that don't don't last.

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Vern,

I suspect you're arguing with a point I didn't make, though I admit I'm having trouble articulating what my point may be.

I'm not arguing that Facebook and Google and Apple aren't concerned with their products' costs. Of course they are. What I'm trying to say is that Apple and Google and other tech companies do not, to my knowledge, hire people whose job it is to go around and monitor cost-reduction efforts and then collate the information and then report it to a DCMA ACO.

Perhaps I'm wrong. But I've worked for Top 5 defense contractors as well as mid-tier contractors as well as tech-focused companies, and I've consulted to many more in diverse industries including bio-pharma and telecomm. All I can say is that some of those companies had such a focus and such a reporting bureaucracy and, for the others, it would be a head-scratching moment. Defense contractors are happy to establish that function and add it to their overhead rates because their customer is happy to pay for it. The others do not embrace the need.

Of course you are correct that companies that don't focus on cost reduction don't last. Except for those companies that are sole source providers to the DOD.

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53 minutes ago, here_2_help said:

I'm not arguing that Facebook and Google and Apple aren't concerned with their products' costs. Of course they are. What I'm trying to say is that Apple and Google and other tech companies do not, to my knowledge, hire people whose job it is to go around and monitor cost-reduction efforts and then collate the information and then report it to a DCMA ACO.

Help:

I'm not trying to be difficult; I'm just responding to your assertions. As for the latest assertion, it seems to me that if a company has decided to cut costs, then it is likely that it has told somebody to keep an eye on costs and report what they find out to somebody else in the company. If DCMA shows up and wants to know what it's doing about controlling and cutting costs, it has information that it could share if so inclined.

I don't doubt for one minute that companies like Apple and Google wouldn't be particularly eager to spend a lot of time with DCMA bureaucrats explaining and justifying what they're doing (or not doing). Maybe that's the point that you are trying to make.

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H2H, I think you are over analyzing the DCMA Instruction.  It does not say that contractors must come up with cost reduction initiatives.  What it says is if they do have such initiatives, are the results reflected in forward pricing rates. 

Interestingly, the DCMA Instruction is intended to implement PGI 242.3.  The PGI is supposed to provide internal guidance to DoD personnel only.  It is not supposed to impose requirements on contractors.  Further, note that the PGI guidance applies to contract types other than cost reimbursement contracts.  Instead, it applies to all contract types except FFP and FP(EPA).  Theoretically, the PGI guidance would apply to T&M contracts for commercial items.  Additionally, the guidance is only mandatory in regard to contractors that do a minimum amount of business with DoD.  Therefore, it does not apply to all cost reimbursement contracts.

H2H, I am sure you are familiar with DCAA operational audits where DCAA audits the economy and efficiency of a contractor's operations.  It seems to me that the cost monitoring program described in the PGI and DCMA Instruction are ACO versions of such audits.

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I have first hand experience with DOD "should-cost" audits where this has been a topic of discussion (2 for 2) and the team was disappointed to learn that the contractor had nothing to report. To be very clear, the contractor was relentlessly focused on performance improvement and manufacturing efficiency and technical excellence; the company simply didn't measure the resulting savings and thus there were no results to report. There were no spare heads to dedicate to the effort of measuring results.

I'm reminded of the Toyota production philosophy that the most efficient production system is also the cheapest. But Toyota didn't need bean-counters to measure the amount of savings generated from process improvements. It was intuitively obvious to those running the plant.

I just thought I would explore the topic. I would be happy to hear from active ACOs if they would care to chime in.

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On ‎8‎/‎11‎/‎2017 at 0:27 PM, here_2_help said:

What I'm trying to say is that Apple and Google and other tech companies do not, to my knowledge, hire people whose job it is to go around and monitor cost-reduction efforts and then collate the information and then report it to a DCMA ACO.

I previously worked for a division of GE for a few years.  While the division I worked for wasn't a "tech" company and it did not have Federal contracts, we did have people who's primary job was to be a cost productivity manager.  Folks in manufacturing, engineering, and sourcing would work with that person on projects to reduce the cost of the product we sold. Projects were discussed, valued, and if appropriate pursued and monitored to completion.  If fact, we reported on those projects on a routine basis to top executives in our division.  Had that division of GE sold the product to the government, it would have been easy to roll information regarding those efforts into a report. 

 

On ‎8‎/‎11‎/‎2017 at 6:30 PM, here_2_help said:

To be very clear, the contractor was relentlessly focused on performance improvement and manufacturing efficiency and technical excellence; the company simply didn't measure the resulting savings and thus there were no results to report. There were no spare heads to dedicate to the effort of measuring results.

While companies have different priorities and resources, I'm surprised someone didn't track the savings in some manner, even if it was a minor part of their job.  Otherwise, how would they know the value of the improvement they made or if it was worth the cost/benefit.  I would think that top management would want to know the benefit of the efforts being made or which cost saving projects to pursue over others.

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46 minutes ago, Todd Davis said:

I would think that top management would want to know the benefit of the efforts being made or which cost saving projects to pursue over others.

Yeah, DCMA thought so, as well. They were wrong, though.

To my knowledge there were NO "cost saving projects". Period. There were, however, many upon many process improvement and production efficiency initiatives.

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