DCAA Changes the Grading Scale

Many companies have been “getting by” for years with systems that are generally OK, but have issues. DCAA would issue a report with a finding that the system was “deficient in part” and make suggestions for improvement. For the most part, as long as the contractor promised to make the suggested improvements they could continue to operate. They may not be able to do that for much longer.

Under the old scale, grades for systems reviews ranged from “A” (we really couldn’t find anything worth writing up) to “F” (completely unacceptable for use on Government contracts). But there were plenty of grades in between. A minor deficiency would get you the equivalent of a “B” or a “C+” and ordinarily you could keep using the system for as long as you kept promising to fix it. If you never really got around to fixing it, nothing much happened. Even a material deficiency only got you a “C-“ or a “D.” Fixing that kind of problem had a little more urgency to it, but you could take a reasonable amount of time to get it done and you could usually rely on the recommended improvement in the audit report.

On December 19th, 2008, the Defense Contract Audit Agency (DCAA) issued new audit guidance to clarify what constitutes a significant deficiency or material weakness and to establish new guidance on reporting audit opinions on contractors systems. DCAA’s new posture is that a system review may ONLY result in a finding of either “wholly adequate” or “inadequate.” And, they will no longer make ANY suggestions for improvement. In addition, the guidance memo directs that all reports with a finding of inadequate should include a recommendation to the Administrative Contracting Officer (ACO) that payments to the contractor be suspended on all cost-type contracts and fixed price contracts with progress payments until the problem is fixed. Click this link for a copy of the letter from the DCAA web site.

It looks to me like DCAA’s grading system just became pass/fail! The only grades now are “A” and “F.” And, if you get an “F,” your cash flow could dry up until you fix the problem. And, of course, under the new ban on suggestions for improvement, how you fix it is up to you.

Of course, fixing the problem really isn’t the issue. Assume you could remedy the problem instantly – despite the fact that DCAA is refusing to make any suggestions. It could still take weeks or even months to get DCAA to conduct a follow-up review, write a new report and then get the ACO to reverse the suspension of payments. And, if that wasn’t enough, an audit report concluding that a contractor’s system is “inadequate” could preclude award of new cost-type contracts until the report is rescinded or superseded.

Being ineligible for new contract awards is a bad thing, but months under a payment suspension could be fatal. With today’s credit constraints, most small and mid-sized firms’ wouldn’t last that long without cash flow. Companies might think they could survive a temporary payment suspension, but many wouldn’t. And, with no receivables to secure additional financing, the banks aren’t likely to be willing to help.

So where did this new attitude come from and what’s a company to do?

The guidance appears to be a knee-jerk reaction to a GAO report from last summer that concluded that some DCAA audit reports did not meet professional standards and, that in some cases DCAA was much too close to the contractors they were auditing. To be fair, it also concluded that DCAA was too close to the Government Program Offices on whose behalf they were conducting the audits! In short, they were just being too cooperative, too collaborative and TOO NICE! Click here for a copy of that report.

I’m sure the Agency saw this new guidance as necessary to address perceived auditor independence and GAGAAS compliance issues, but collaboration and cooperation weren’t the problem. I worked in the industry when the relationship between DCAA and contractors was extremely adversarial and it did NOT produce a better result.

This seems like a return to the bad old days and unnecessary to boot.

David and Goliath Redux - The Delex Protest

The Government has long held that most FAR provisions controlling things like competition, set-asides, protests and the like applied only to “contracts” and not to delivery orders issued under those contracts. Under this construct, giant Government Wide Acquisition Contract (GWAC) programs like Millennia (GSA), ANSWER (GSA), SEWP (NASA), ENCORE (DISA), READ (EPA) and COMMITS (Commerce) were considered exempt from requirements to set aside delivery orders for small businesses or even to compete delivery orders among contract holders when it was inconvenient.

Because delivery orders were considered to be not subject to protest, contract holders left out in the cold had little or no recourse. That all changed last January when the 2008 Defense Authorization Bill made large delivery orders subject to protest.

Now, all kinds of issues are arising out of protests of delivery orders. One of those was decided by the GAO on October 8th, 2008.

A small company by the name of Delex Systems protested a Delivery Order Proposal Request (DOPR) for training services issued to all holders of Naval Air Systems Command (NAVAIR) Training Systems Contracts (TSC II) on an unrestricted basis. Under a FAR provision (§ 19.502-2(b)) commonly referred to as the “Rule of Two,” Delex maintained that NAVAIR was required to set aside the requirement exclusively for the participation of small businesses under FAR 19.502-2(b). The so-called Rule of Two requires agencies to set aside for small businesses any acquisition exceeding $100,000 if there is a reasonable expectation of receiving fair market price offers from at least two responsible small business concerns. The Government responded that a delivery order is not a “contract” and therefore the action contemplated was not an “acquisition” and not subject to the rule.

GAO disagreed and found for Delex.

Here is the Digest in full text:

(1) The set-aside provisions of Federal Acquisition Regulation (FAR) § 19.502-2(b) apply to competitions for task and delivery orders issued under multiple-award contracts.

(2) Protest is sustained where agency failed to comply with the set-aside provisions of FAR § 19.502-2(b), when issuing, on an unrestricted basis, the solicitation for a delivery order under multiple-award contracts.

(3) Protest alleging that agency erred in concluding that it had no reasonable expectation of receiving offers from two small businesses is sustained where the record shows that the agency’s set-aside determination is not adequately supported by the record.

So far, this stuff is dry as dust. Here’s the thing. Remember that list of GWACs back in the first paragraph? That’s just a few of the dozens that are out there and they are ALL affected by this decision. And it’s that third finding that has the impact.

Until the Delex decision, it was up the agency (or the funding source) to decide whether the requirement should be directed to a single company, competed without restriction or set aside for small businesses. And if someone disagreed, it was just tough. Delivery orders couldn’t be protested.

But, now they can. And if the agencies don’t follow the Rule of Two in their delivery order competitions, a protest can stop the acquisition cold. The only wiggle room left to allow unrestricted competition is the “reasonable expectation of receiving offers from two small businesses.” If that reasonable expectation doesn’t exist, an agency does not have to set aside the order under the Rule of Two. The problem with most of those giant GWAC programs is that the Government has pre-qualified multiple small businesses in making the original awards! All of those programs made awards to multiple large businesses and multiple small businesses – in some cases, as many as twenty or thirty of each. And, for the most part, the statements of work in all the contracts on a given program are identical.

With multiple, pre-qualified small businesses in each program, it will be virtually impossible for the Government to assert that they have no expectation of receiving offers from two small businesses. Effectively, this ruling could cause nearly all delivery orders under these programs to be set aside for the small businesses that hold contracts under them.

If you’re a small business, this is very good news indeed. If you’re a giant corporation, this is probably a tiny concern for your business. If you’re a mid-sized Government contractor and you have invested heavily in “winning” contracts in the GWAC programs, this is a major development. And, it’s not a good one.

This gives a whole new meaning to the term “mid-sized squeeze.”