1. 10/6/2015 1 Eleanor Spector VP, Contracts Industry Hot Issues NCMA, April 28, 2009

2. 10/6/2015 2 Current Contracting Issues Award and incentive feesAward and incentive fees Fixed price contracts developmentFixed price contracts development Conflicts of InterestConflicts of Interest Ethics policy changesEthics policy changes ProtestsProtests Protectionist legislationProtectionist legislation

3. 10/6/2015 3 Award and Incentive Fees GAO report (12/19/05)GAO report (12/19/05) –$8B in award fees paid regardless of outcomes on sampled programs –Rollover on 52% of award fee contracts –Significant amounts paid for “acceptable, average, expected, good or satisfactory performance” GAO failed to acknowledge that the “outcomes” are the best weapon systems in the world, notwithstanding cost, technical and schedule problems due to upfront uncertainty in development.GAO failed to acknowledge that the “outcomes” are the best weapon systems in the world, notwithstanding cost, technical and schedule problems due to upfront uncertainty in development.

4. 10/6/2015 4 Award and Incentive Fees (continued) OSD policy memos (3/29/06, 4/24/07)OSD policy memos (3/29/06, 4/24/07) –Tie award fees to milestones –Rollover is the exception rather than the rule –Urged multiple incentive contracts –D&F required to use CPAF contract –Defined “satisfactory” as no greater than 50% award fee Industry challengeIndustry challenge –Declining award fee scores

5. 10/6/2015 5 Award and Incentive Fees (continued) Few companies capable of performing challenging DoD contracts. We are inventing the future; cost and schedule are impossible to predict accurately.Few companies capable of performing challenging DoD contracts. We are inventing the future; cost and schedule are impossible to predict accurately. DoD must consider the impact on its contractor base in fee policy and implementation.DoD must consider the impact on its contractor base in fee policy and implementation. Fee policy must ensure a strong, creative industrial base with assets to attract and retain critical skills.Fee policy must ensure a strong, creative industrial base with assets to attract and retain critical skills. Contractors earning fair returns invest in IR&D and capital assets.Contractors earning fair returns invest in IR&D and capital assets. Contractors have seen decline in award fee scores for comparable performance.Contractors have seen decline in award fee scores for comparable performance.

6. 10/6/2015 6 Fixed Price Development Pendulum is swinging back toward FP contracts for development and low rate production.Pendulum is swinging back toward FP contracts for development and low rate production. Sec. 818 of FY07 NDAA (10/17/06) shifted paradigm from senior level approval for FP development to senior level approval for CR development.Sec. 818 of FY07 NDAA (10/17/06) shifted paradigm from senior level approval for FP development to senior level approval for CR development. Sec. 864 of FY09 NDAA (10/14/08) requires revisions to the FAR to address appropriate use of cost- reimbursable contracts.Sec. 864 of FY09 NDAA (10/14/08) requires revisions to the FAR to address appropriate use of cost- reimbursable contracts. President Obama (3/4/09) directed OMB to issue guidance on all contract types. “There shall be a preference for FP type contracts.”President Obama (3/4/09) directed OMB to issue guidance on all contract types. “There shall be a preference for FP type contracts.”

7. 10/6/2015 7 Fixed Price Development (continued) Cost growth on FP development contracts equivalent to that on cost reimbursable contracts and Government struggles with claims and terminations.Cost growth on FP development contracts equivalent to that on cost reimbursable contracts and Government struggles with claims and terminations. Competition fosters technical, schedule, and cost optimism. Contractor proposal becomes basis for budget, with no cost reserves.Competition fosters technical, schedule, and cost optimism. Contractor proposal becomes basis for budget, with no cost reserves. FP development for major systems drove companies close to bankruptcy and prohibited the flexibility to do necessary redesign and retesting.FP development for major systems drove companies close to bankruptcy and prohibited the flexibility to do necessary redesign and retesting. Inappropriate use of FP contracts has never resulted in a successful program.Inappropriate use of FP contracts has never resulted in a successful program.

8. 10/6/2015 8 Section 841 of FY09 NDAASection 841 of FY09 NDAA –OFPP issue policy to prevent personal conflict of interest (PCI) by contractor employees performing acquisition functions closely associated with inherently government functions. For other contractor employees, OFPP determine if revisions to the FAR necessary to address PCI. Levin-McCain bill (introduced 2/23/09)Levin-McCain bill (introduced 2/23/09) –Section 205 would require a contract for SETA functions on a major weapon system contain a provision prohibiting the contractor from having a financial interest in the development or construction of the weapon system. OCI and PCI

9. 10/6/2015 9 OCI and PCI (continued) SASC markup of Sec. 205 creates an exception for affiliates that are separated by mechanisms similar to those required under rules governing foreign ownership, control or influence over U.S. companies that have access to classified information and allows for a phase-in period until January 1, 2011.SASC markup of Sec. 205 creates an exception for affiliates that are separated by mechanisms similar to those required under rules governing foreign ownership, control or influence over U.S. companies that have access to classified information and allows for a phase-in period until January 1, 2011. 3/4/09 Obama Memo requires OMB to clarify when governmental outsourcing for services is appropriate. Effective processes in place to perform OCI screening and mitigation. Hundreds of OCI plans effectively implemented.

10. 10/6/2015 10 Ethics Policy Changes DoD referrals of cases for possible criminal prosecution were 76% lower in 2008 (86) than in in 2001 (213) while defense contracts doubled to $400B in FY08.DoD referrals of cases for possible criminal prosecution were 76% lower in 2008 (86) than in in 2001 (213) while defense contracts doubled to $400B in FY08. This is good news on the state of industry ethics… however, now policy has been issued aimed at more prosecutions.This is good news on the state of industry ethics… however, now policy has been issued aimed at more prosecutions.

11. 10/6/2015 11 Ethics Policy Changes Mandatory DisclosuresMandatory Disclosures –FAR 52.203-13, issued 12/08, moves certain disclosures of statutory violations or significant overpayments from voluntary to mandatory –Requires reports in writing to: Agency OIG, andAgency OIG, and Contracting OfficerContracting Officer –Suspension and debarment for knowing failure by a principal to timely disclose –Must report “credible evidence” of: –violations of federal criminal law involving fraud, conflict of interest, bribery, or gratuities; –violations of the Civil False Claims Act; or –significant overpayments.

12. 10/6/2015 12 Ethics Policy Changes Most companies are already reporting violations voluntarily, though not necessarily to the IG, so mandatory disclosure may not have enormous impact.Most companies are already reporting violations voluntarily, though not necessarily to the IG, so mandatory disclosure may not have enormous impact. 3/13/09 DCAA policy on reporting actions of Government Officials3/13/09 DCAA policy on reporting actions of Government Officials –DCAA will now report “certain unsatisfactory conditions” to the IG including contracting officer not having DCAA prepare a complete audit or ignoring an audit report and awarding a contract at “excessive costs and/or profit.” –DCAA audits contractors, should not be reporting on its customer without going through contracting chain.

13. 10/6/2015 13 Protests For 90 years, GAO has resolved protests.For 90 years, GAO has resolved protests. The number of protests is relatively small.The number of protests is relatively small. –Federal Government awards 6M contracts a year. –In FY08, 1,652 awards were protested, 60 protests sustained. Protests getting considerable attention because large contracts have been protested with re-competes taking years.Protests getting considerable attention because large contracts have been protested with re-competes taking years. FY08 NDAA permits contractors to protest task orders of over $10M. Previously, protests were limited to assertions that the task order changed the scope, period, or maximum value of the contract. This will further increase protest numbers.FY08 NDAA permits contractors to protest task orders of over $10M. Previously, protests were limited to assertions that the task order changed the scope, period, or maximum value of the contract. This will further increase protest numbers.

14. 10/6/2015 14 Protectionist Legislation U.S. aerospace industryU.S. aerospace industry –$97B in exports in 2007; $61B surplus –Largest surplus of any manufacturing sector If the U.S. imposes protectionist measures, other countries follow suit.If the U.S. imposes protectionist measures, other countries follow suit. Recovery Act includes iron, steel and manufactured goods protections for public works projects.Recovery Act includes iron, steel and manufactured goods protections for public works projects. Industry watches legislation closely for any new protectionist legislation.Industry watches legislation closely for any new protectionist legislation.

15. 10/6/2015 15 Summary Important activity in legislation and regulation that industry attempts to shape.Important activity in legislation and regulation that industry attempts to shape. Focus of new administration.Focus of new administration.

16. GS 0000 10/6/2015 16