Meet the most hated man in the Pentagon - Politico

Matthew Fleharty said:

Just stopping by to share an interesting read (via Politico) regarding the current pricing environment in the Department of Defense.  Enjoy and looking forward to the discussion!

http://www.politico.com/story/2016/04/defense-pentagon-spending-assad-221776

Thank God that Assad "learned a valuable lesson from his years at Raytheon, one of the Pentagon's largest contractors:"  He said "We generally overpay for almost everything we buy." (http://www.politico.com/story/2016/04/defense-pentagon-spending-assad-221776)  I will vouch for that, based upon his and my experiences on a large Chemical Weapons Destruction and Disposal, Systems Contract at Umatilla Chemical Weapons Depot in North-Eastern Oregon. 

In 1998, Assad was Executive Vice President and served as the COO and subsequently, as the Chairman and CEO of Raytheon Engineers and Constructors, Inc.(RECI).  I believe that Raytheon Demilitarization Company (RDC),  another legal entity under Raytheon, was the Prime Systems Contractor and that RECI constructed the project under a Firm-Fixed Price portion of the Systems Contract.

I had an extremely unfortunate, unpleasant, stressful and painful experience, dealing with both Raytheon entities on that project from early 1997 until mid 2000.

Sometime in late 1999 or early 2000, I sat face to face across from Shay Assad at a small table in a Salt Lake City hotel meeting room, surrounded by a roomful of various standing Government and Raytheon executives, as well as other project participants.  We exchanged official positions on a $36 million REA that later grew to ~$136 million.

In July 2000, Raytheon sold RECI to Washington Group International - WGI (the former Morrison-Knudsen Construction Co.),  WGI finished the construction phase of the project in 2001 under great financial distress.  WGI sued Raytheon, as well as Shay Assad and others, concerning the circumstances of the overall sale, not necessarily over this one project.

Maybe its a good thing that he is on the other side of the table now...

Hi, Joel,

When they said most hated, I suppose they weren't just whistling Dixie.

Hey, ap. I don't hate Shay Assad.  

But I witnessed how a major Defense Contractor struggled on two of our large, complex and challenging FFP construction phases of overall Systems Contracts. It didn't appear to fit their Corporate and overall business identity.  It could take a large book to tell the entire story of The Umatilla project, alone. 

I personally thanked God for Raytheon selling their E&C business to the Washington Group, although the WGI folks in Boise, Idaho might have wished differently afterwards.

It was alleged in the WGI lawsuit that Raytheon did not disclose hundreds of millions of dollars of losses on numerous ongoing FFP contracts.  

I actually suggested to the WGI VP for Contracts that WGI should closely examine the real status of construction on one contract under the purchase at one of our other project sites. Without going into detail, I was suspicious concerning the "everything is rosey" status reporting by both our RE and their site manager (former RECI employee) at the quarterly Program Management Reviews. WGI investigated. They found that the Schedule to complete was "optimistic". The estimated cost to complete the project was tens of millions of dollars over the remaining contract amount.  The project was actually many months behind a realistic schedule, based upon labor and resource requirements for the remaining work.

 There were no open changes or other contractual issues impacting the cost or schedule at that site, as we had incorporated all major programmatic design changes into the contract before construction began to eliminate/mitigate impacts.

Without elaborating, our RE and the Site Manager both retired...

Hi, Joel,

Didn't mean to imply that you did.  Just thought your anecdote supported the premise of the article. 

BTW, Politico crashes my work browser.  I wish more web sites were as clean as this one.

And Joel the legacy of Umatilla (which is essentially in my back yard) continues.   It ain't over until it is over.....

The Umatilla Army Depot land is now scheduled to return to local control in 2017.

East Oregonian

Published on April 4, 2016 12:01AM

The Army’s latest schedule has the former Umatilla Chemical Depot land in local control by May 2017.

The Columbia Development Authority was supposed to receive the land in 2015, but it has twice been delayed — first until Nov. 2016, and now until the May 2017 date.

On Monday, the authority’s executive director and board agreed that progress was still being made, but also expressed frustration that it has taken so much longer than promised.

“The length of time in the transfer is costing us opportunities,” board chair and Umatilla County commissioner Bill Elfering said.

After the Army conveys the former depot land along Interstate 84 east of Boardman, part of it will be used as a National Guard training facility. But the rest will fall under the control of the development authority for a wildlife refuge and industrial development.

The authority has repeatedly stated that it is not taking the land off the Army’s hands unless it is “free, clean and has water.”

In October executive director Greg Smith said that the Army’s initial proposal to give the authority approximately 25 percent of the site’s water was not nearly enough to support the scale of economic development needed to make the site worthwhile to acquire. On Monday he said water rights negotiations were slowly moving along, with the Army agreeing to give two wells to the Columbia Development Authority, three to the National Guard and have two wells split between entities.

“It comes down to well number one,” Smith said.

He said the Pentagon insists it needs the water rights to that well, but has also said it is open to leasing most of those rights to the authority if they worked together to put in infrastructure needed to get the defunct well working again.

“I genuinely think they want to reach a good resolution,” Smith said. “But their dilemma — and I think they’re sincere on this — is that they have a national security issue.”

That issue is wanting to make sure they have the infrastructure in place, should the water be needed once again to support a war effort. They also want to have the water on hand for fire suppression.

Those issues were discussed when Smith and board members Kim Puzey (Port of Umatilla) and Gary Neal (Port of Morrow) met with Defense Base Closure and Realignment Commission (BRAC) officials in Washington, D.C. in March. Puzey said the atmosphere of the meeting started off “bristly” and “prickly” but Smith did a good job of practicing the principle “seek first to understand, then to be understood” and the tension in the room lowered considerably as things went on.

Puzey said even though the water discussion was taking a long time, he believed that taking the time to negotiate was, in the end, going to be mutually beneficial for both the development authority and the National Guard.

Smith said he felt that another trip to Washington, D.C., in the next couple of weeks while Congress is going through the appropriations process would be highly productive for moving things along. The board agreed.

At the beginning of the meeting the board heard from a potential client. Taylor Steele said her employer, One Energy Renewables, a Seattle-based company specializing in utility-scale solar farms, was interested in leasing a section of depot land for a solar panel installation.

“I’ve been out there and saw some sites we think are absolutely phenomenal,” she said.

When asked how big of a project they were looking at, she said things could change but they would consider somewhere in the ballpark of 20 megawatts. The solar array Umatilla Electric Cooperative just brought online in Umatilla County is 1.3 megawatts and puts out enough energy for 112 homes.

Puzey said he thought One Energy Renewables would be a good example to take to the federal government and show them the types of projects that are being held up because the conveyance process was taking so long.

The Columbia Development Authority is a partnership between Umatilla County, Morrow County, Port of Umatilla, Port of Morrow and the Confederated Tribes of the Umatilla Indian Reservation.

Thanks for the info, ap and Carl.  The Umatilla turnover delays don't surprise me, based upon my experience in the Chemical Demilitarization Program,  due to factors beyond the Army's control.

Must reading:

"What does Shay Assad mean by 'Fair Price'?" http://www.atlanticcouncil.org/blogs/defense-industrialist/what-does-shay-assad-mean-by-fair-price

Vern,

Excellent article -- thanks for sharing the link. It led me to the tentative maxim: "Buy the way you fight."

H2H

I just wanted to point out one of the Terms of Use here.  It is

"9. No copyright infringement. This includes the copying of a copyrighted item and pasting it verbatim in a post. For example, do not copy and paste press releases, news articles in their entirety, etc. If you wish to note a copyrighted item, highlight it, and provide a link to the full copyrighted document so that the copyright holder is identified."

It is easy to cut and paste a copyrighted item and forget to add a link to the original item.  I had missed it for several days above and just added a link today.  I need you to help me enforce this policy by adding links to all your articles.  Preferably, you should add a paragraph and force the reader to go to the original document by linking to it.

Once in a while we forget and when I see it, if I do, I will let you know about it.

here_2_help said:

Excellent article -- thanks for sharing the link. It led me to the tentative maxim: "Buy the way you fight."

I'll probably take a lot of flak for the following remarks, but I disagree.  I don't think buying "unfairly" is appropriate when the DoD is funded with taxpayer's dollars and represents approximately 15% of all federal dollars spent and roughly 50% of the discretionary budget (though the exact values vary from year to year, it is pretty clear the DoD represents a considerable portion of the federal budget on average).  As such, we have an obligation to fulfill public policy objectives, which includes maintaining fairness in our processes.  Sure, that introduces inefficiencies into the procurement system, but I'd argue that it's worth it in order to maintain the public's trust (they pay our salaries and for our requirements).

The author of the article posted by Vern states in his concluding paragraph "the problem is that the cultural focus on fairness often prevents the government from buying the right kit from the right supplier at the right price, just because everybody has to be given a fair chance to try for that fair price" (http://www.atlanticcouncil.org/blogs/defense-industrialist/what-does-shay-assad-mean-by-fair-price); however, is the problem truly fairness or could it be an undereducated acquisition workforce, poor requirement(s) development, etc.?  I think as a community we can maintain the former by doing better at the latter.

Matthew:

I'm trying to understand your point. Are you saying that the problem is not with acquisition principles, rules, and procedures, but with workforce execution?

I've worked for both government and industry (a Fortune 10 firm).  In general, the profit motive (need to make a return for shareholders) drives getting the best deal for the company, even if it means being very aggressive at times during negotiations or employing certain tactics that wouldn't be considered appropriate in government contracting.  I don't think there is anything wrong with negotiating aggressively and seeking a great deal for the taxpayer when using negotiated procedures.  If fact, I think all COs should seek to a great deal for the government.  That is what most contractor representatives seek for their business.  To me fairness includes dealing with all firms equitability and not prejudicing one over another, as well as complying with procurement integrity statutes and regulations.  It means following the requirements of the FAR and applicable supplements.  However, I don't think it is "unfair" to drive a hard bargain and negotiate a great deal for the government.  I suspect too often $$ or some other benefit to the government is left on the table because the CO had the ability to determine the price offered was fair and reasonable (i.e. based on past procurement history or a government estimate, etc.).  I also think there is a difference between the inefficiencies caused by the burdensome regulatory environment government COs operate in, versus leaving significant $$ on the table during a negotiation or not conducting negotiations at all.  The former adds cost because of inefficiencies, some necessary, some not, but the regulations are what they are.  The latter doesn't have anything to do with inefficiencies but rather CO inaction, which also has a cost.  Sure, better requirements documents and a better trained/experienced workforce can help reduce waste and save $$, but I think that COs could do more to obtain a better deal for the Government without resorting to using unfair practices or treating a prospective contractor as an "enemy".  The depth, vigor and frequency of negotiations I saw during my time in industry pales to what I've observed in government before and after my time in industry.  While taxpayers expect and deserve a fair contracting system, I suspect they also want the government to spend less on a particular contracting action when they can by negotiating a great deal on their behalf.

Todd Davis said:

I think that COs could do more to obtain a better deal for the Government without resorting to using unfair practices or treating a prospective contractor as an "enemy".

Like what, specifically?

Vern Edwards said:

Like what, specifically?

These are just a few that come to mind:

- Help develop better requirements documents.  Be more clear as to what the Government needs are and reflect market standards and practices where possible.

- CO should better understand what they are purchasing, the current market environment and cost drivers for what they are acquiring.  Goal should be to mitigate costs where possible.  During my time in industry many of the systems I procured were driven by the cost of certain metals and foreign currency.  We developed strategies around these risks to mitigate cost drivers.

- Conduct discussions more often when it makes sense.  The first offer of any firm is generally not their best offer.  There is almost always room to negotiate.  For example, even a 2-5% reduction on a $1,000,000 procurement is $20,000-$50,000.  That is nothing to sneeze at from my perspective as a fellow taxpayer.  If this practice is repeated on other procurements, over time hundreds of thousands, or even millions, of dollars could be saved by a single office or CO.

- Go into a negotiation prepared.  Establish objectives ahead of time.  Know what the other side is going to say and be ready to counter their argument or address it.  I've gone into a negotiation unprepared in the past and it is a miserable feeling.  I felt like an idiot and I didn't accomplish what I needed to.

- Use technical experts (when available) to assist with not only negotiation prep, but have them available during negotiations.  For me, the engineers I worked with were an invaluable source of knowledge and experience.  They new the product/service well, cost drivers, and often the market place and certain suppliers.

- During a negotiation, don't be afraid to say "no" or "that is unacceptable".  When approached by suppliers with cost increases the first thing I said was, "no", plain and simple.  The second thing out of my mouth was usually "how can you get me a cost reduction".  Most contractor's are looking internally for ways to reduce costs to increase their profitability.  Naturally, they don't want to give a portion of this up if they don't have to.  However, if it means having a better chance of obtaining a contract (revenue) they may be inclined to reduce their costs.  One of the things the business I worked for was focused on was cutting out the waste (lean [transactional and manufacturing]) to increase profitability.  We expected if of our suppliers, especially if they were observed to be operating inefficiently and at the same time trying to pass increased costs on to us.

- Ask questions like, how can we get this price lower or increase the benefit to the Government.  The prospective contractor may be willing to relent on price and/or have solutions that will increase the benefit to the government or reduce cost.

Well, Todd, people have been suggesting every single one of those things for more than 40 years, apparently without lasting effect.

Thanks, anyway.

Vern Edwards said:

I'm trying to understand your point. Are you saying that the problem is not with acquisition principles, rules, and procedures, but with workforce execution?

Vern, I've read enough of your work to know better than to say there are no problems with acquisition principles, rules and procedures; however, as I was reading the article you provided I couldn't help but think about the Supreme Court's "least restrictive means" standard when dealing with free speech issues and how a similar standard could/should be applied concerning the principles governing the execution of federal acquisitions.  Whether we like it or not, government contracts are taxpayer funded and, as such, should take public policy objectives into consideration as much as possible - this includes maintaining fairness within in the acquisition system.  I suppose my point is that in trying to improve the effectiveness of said acquisition system, I'd argue we should first concentrate on other means to do so before we start compromising principles of fairness (or others) by creating more exemptions/exceptions.

Todd Davis said:

While taxpayers expect and deserve a fair contracting system, I suspect they also want the government to spend less on a particular contracting action when they can by negotiating a great deal on their behalf.

Are the two mutually exclusive?  Maybe I misread the article, but it seemed to me like the author was stating that "fairness" was being employed to extract too much information or force too hard of a bargain from industry...

I think Todd Davis raises one interesting point -- i.e., "During my time in industry many of the systems I procured were driven by the cost of certain metals and foreign currency.  We developed strategies around these risks to mitigate cost drivers." It is a well documented fact that the DOD lacks a coherent approach to acquiring certain strategic metals (e.g., titanium). Instead of centralizing purchases and using that volume to pressure the three domestic suppliers to lower prices, DOD too often pays its contractors to acquire titanium on a piecemeal basis, contract by contract. And then it protects those contractors by including economic price adjustment clauses, which (glossing over nuance) permit the contractors to pass on any price increases, thus reducing pressures to negotiate hard with one of the three domestic suppliers.

Not my opinion. it is the opinion of the DOD OIG in a 2009 report released in February 2010, Among other things, the DOD OIG found that 'the BLS producer price index for titanium mill shapes, used in the economic price adjustment clause of the Navy F/A-18 E/F Super Hornet contract, was outdated and subject to extreme market volatility, as it was primarily based on spot market prices. The index was also too narrow to be used in DOD multiyear contracts…” 

So the DOD could do more and it should do more. It could buy titanium (and other strategic materials) directly, establish a stockpile, and then provide the metals directly to its contractors as government-furnished material. According to the DOD OIG, that change would save taxpayers from $100 to $300 million annually.

Matthew Fleharty said:

Are the two mutually exclusive?  Maybe I misread the article, but it seemed to me like the author was stating that "fairness" was being employed to extract too much information or force too hard of a bargain from industry...

No.

"Too much" is a relative term and is based on perspective.  I would expect, when pressed, for the other party in a negotiation to say that something is "too much".  However, if the actions of a CO are not inconsistent with the FAR and the negotiation is conducted in good faith, it would be hard for me to see where out I was out of line.  Of course a prospective contractor would likely look at it differently.  Part of negotiations is to press the other side to obtain the desired outcome.  I would expect a contractor to treat me any differently in a negotiation.  I would expect them to press me hard and challenge my positions in order to get me to concede to their position as much as possible.  Also, I would suspect that some of the same people that say "too much" are the same ones pressing their suppliers and subcontractors for price and other concessions during negotiations.  Again, all a matter of perspective.

here_2_help said:

So the DOD could do more and it should do more. It could buy titanium (and other strategic materials) directly, establish a stockpile, and then provide the metals directly to its contractors as government-furnished material. According to the DOD OIG, that change would save taxpayers from $100 to $300 million annually.

That is not chump change.  Among the key ingredients are leadership, communication, and accountablity.

Matthew Fleharty said:

Whether we like it or not, government contracts are taxpayer funded and, as such, should take public policy objectives into consideration as much as possible - this includes maintaining fairness within in the acquisition system.  I suppose my point is that in trying to improve the effectiveness of said acquisition system, I'd argue we should first concentrate on other means to do so before we start compromising principles of fairness (or others) by creating more exemptions/exceptions.

Matthew:

Let's think about this.

What does "fairness within the acquisition system" mean, and why should fairness be public policy? That question may seem absurd at first, but only because the words "fair" and "fairness" are so widely used and heavily freighted in our society that we rarely ask people who use those terms what they mean by them. And if we did, few could answer clearly and definitely.

Let's consider a speculative case. If we have worked with Company A for five years and they have provided excellent service at what we consider to be a reasonable price, why should we conduct an 18 - 24 month contract action and seek full and open competition for a new contract? Why not just negotiate a new one with the incumbent? We know that the contractor is qualified. We know what the service costs, and we can negotiate a fair and reasonable contract price. A new contract with the incumbent would give us continuity of operations. A new competitive contract action would be costly and any proposal that would come in at a lower price than we could negotiate with the incumbent would bring with it a significant level of performance uncertainty.

Except for the laws, why conduct a new competition? Improved quality and price through innovation? Maybe, but there would be no way to know until performance was well underway. Prevention of corruption? Maybe, but let's assume for the moment that corruption is detectable and preventable. Fairness to other companies by giving them a chance? Hold on. Why do we care about that? Doesn't fairness to the taxpayers come first? If I have a good business partner who has done a good job for me and is highly likely to do so again and at a fair and reasonable price, why is it "fairer" to go through a costly and time-consuming competition than to simply continue to do business with them? Isn't that what most businesspeople would do?

I think this is what the author of the article, James Hasik, was alluding to when, talking about procedural fairness, he asked, "Might not long-term best value be a more suitable objective?"

I can't help but think that what you call "fairness" is nothing but a political sop that has little if anything to do with good business practice and outcomes. Consider this. GSA just reported in the Federal Register that:

• 5.6% of all FSS contractors received 80% of all sales;
• the top 20% of FSS contractors accounted for 92.5% of FSS sales; and
• only 2.6% of FSS contractors reported more than $1 million in FSS sales.

81 FR 21346, 48; April 11, 2016. Is that evidence of unfairness, or does it indicate that the FSS system is a sump of "fairness" waste? Think what it cost to award and maintain those 20,094 active FSS contracts. What price "fairness"?

Now, if we want to do business that way for political reasons, well, we're a democratic republic and that's what we'll do. But shouldn't we at least consider the possibility that we'd all be better off if we reconsidered and forsook "fairness" in at least some cases and acted like people running a business? Or is government so fundamentally unbusinesslike that all the talk about "better buying power" is just a lot of hooey?

Vern Edwards said:

Now, if we want to do business that way for political reasons, well, we're a democratic republic and that's what we'll do. But shouldn't we at least consider the possibility that we'd all be better off if we reconsidered and forsook "fairness" in at least some cases and acted like people running a business? Or is government so fundamentally unbusinesslike that all the talk about "better buying power" is just a lot of hooey?

Vern,

Appreciate the well thought out remarks - while I'm contemplating them (and a response), would you mind clarifying what a/the standard would be for forsaking fairness?  If we're talking about acquisitions as a matter of principle, it'd be nice to know what the alternative might be (sounds like it could be business judgment, but I didn't want to be presumptuous).

In my opinion, business judgement--in the sense of what an honest and responsible business manager would do who must answer to the owners (taxpayers) for the performance of the business--is a very good standard of practice.

For instance, assuming that competition is a good thing, is it always best to allow all responsible offerors an opportunity to compete, instead of, say, three firms prequalified through market research? Allowing all to compete might be the appropriate when buying commodities at the lowest proposed price, but it might not be appropriate when seeking proposals to fulfill a complex requirement.

Is it always best to rely on the competitive bids or proposals processes when selecting a contractor, with their complex and restrictive rules about proposal evaluation and business communications, or might it sometimes be better to select the contractor based on qualifications and then negotiate contract terms one-on-one with the selectee, as in architect-engineer contracting?

The Government has attempted to adopt commercial practices with varying degrees of success, but better can be accomplished. Reviewing the processes used by industry and private citizens is probably a good place to start. Both heavily rely on sound business judgment in my experience.

When I worked for industry, we could entire into "life of the program" contracts with key suppliers. We used competition requirements similar to SAP - maximum extent practical considering the tradeoff (price/cost, time, quality, etc.). We didn't concern ourselves with fair and reasonableness price determination documentation, unless it was a Government contract, and simply focused on affordability (is it within budget/goals), availability (will it be where we need it, when we need it), and serviceability (is it able to be used for its intended purpose). Outside of new requirements, our evaluation factors, formally or informally, considered past performance, experience, and price/cost. Past performance data largely captured anticipated availability and serviceability for recurring supplies and services. The other factor and the one that took the most time was assent to our terms and conditions (Ts&Cs). A lot of effort was spent negotiating Ts&Cs, something I don't see frequently in Government contracting. We didn't look at key personnel, management staffing plans, technical approaches (unless a developmental item or switching suppliers to an unknown or unapproved source).

I wonder if the Government could improve things by adopting micro-purchase rules up to SAT and SAP for anything greater than SAT?

Vern Edwards said:

In my opinion, business judgement--in the sense of what an honest and responsible business manager would do who must answer to the owners (taxpayers) for the performance of the business--is a very good standard of practice.

For instance, assuming that competition is a good thing, is it always best to allow all responsible offerors an opportunity to compete, instead of, say, three firms prequalified through market research? Allowing all to compete might be the appropriate when buying commodities at the lowest proposed price, but it might not be appropriate when seeking proposals to fulfill a complex requirement.

Is it always best to rely on the competitive bids or proposals processes when selecting a contractor, with their complex and restrictive rules about proposal evaluation and business communications, or might it sometimes be better to select the contractor based on qualifications and then negotiate contract terms one-on-one with the selectee, as in architect-engineer contracting?

I don't think that the A-E selection method necessarily results in the best designs, the highest quality design products or affordable designs.  I've seen some poor designs from a few of the biggest design firms. I've seen where the "most highly qualified" firm isn't affordable. There are practical reasons for using the Brooks Act approach for selecting a design firm, but it doesn't necessarily ensure the best design products.

I do think that a two-phase process for some complex acquisitions could provide excellent results.  The process could provide for a short-list of the most qualified firms in phase one to compete on the basis of quality of the product or service, within an identified budget ceiling in phase two.  Then, allow for flexibility in proposing the solution.

The selected acquisition approach should be based upon the program or project objectives for cost, time and quality and/or other important objectives.

I agree that if you're looking for the best design you should conduct a design competition, not a qualifications competition.The problem in many system acquisitions is that you don't really have a design competition, you have a concepts competition. The designs are developed after contract award, and the concepts don't always work out. Either way, it would be good to be able to negotiate contract terms one-on-one with the winner instead of soliciting complete proposals and trying to conduct discussions with everyone in the competitive range.

By the way, the all time classic design competition was conducted in 15th Century Florence, Italy, to produce doors for the Bastistry next to the Duomo. Each of the two doors was to have five relief panels illustrating biblical scenes. The winner was Lorenzo Ghiberti, and two of the competitors were Filippo Brunelleschi and Donatello. Each competitor had to produce two full-scale panels. You can still see the Ghiberti and Brunelleschi panels of the Sacrifice of Issac in the Bargello museum. Here is an excerpt from James Fenton's account in The New York Review of Books, March 23, 1995:

Quote

Since your work, standing, and honor were all bound together, the award of a grand commission to a friend or rival would be a devastating blow. It would make you rethink your life, as… Brunelleschi and Donatello were forced to do when Ghiberti won the famous competition for the Florence Baptistry doors. The contest had taken a year. When the entries were exhibited, it was clear to the two friends that Ghiberti’s work was better than theirs, and so they went to the consuls and argued that Ghiberti should get the commission. And for this, [Giorgio] Vasari says, “they deserved more praise than if they had done the work perfectly themselves. What happy men they were! They helped each other, and found pleasure in praising the work of others...”

[T]he consuls asked Brunelleschi, who had clearly come a very good second, whether he would cooperate with Ghiberti on the doors, but Brunelleschi said no, since “he was determined to be supreme in some other art rather than merely be a partner or take second place…” Nor was this a passing fit of pique, although both artists eventually did return to Florence and did help Ghiberti. Perhaps the strength of their sense of failure may be gauged from the fact that Donatello, who had not done so well, took a year away from Florence, whereas Brunelleschi, the honorable runner-up, took at least five, and when he did return, he did so principally as an architect.

*       *       *

It’s not enough to fail. You have to come to feel your failure, to live it through, to turn it over in your hand, like a stone with strange markings. You have to wake up in the middle of the night and hear it whistling around the roof, or chomping in the field below, like some loyal horse—My failure, my very own failure… , I thought I’d left it behind in Florence, but look, it’s followed me here to Rome. And the horse looks up at you in the moonlight and you feel its melancholy reproach. This is after all the failure for which you were responsible. Why are you neglecting your failure?

*       *       *

The judgment on Donatello’s competition entry was: good design, poor execution. Donatello could decipher from that a message saying: You are not yet fully formed as an artist; you must study. But the message received by Brunelleschi was: You will never be as good as Ghiberti. This was a hard blow. Brunelleschi did what he felt necessary—sold a small farm and, with Donatello, walked down to Rome. And there something happened to them which I hope will happen to any poet reading this. Failure rewarded them a thousandfold.

That part about failure gets to me every time.

If you ever get a chance to see those doors, and the second set, "The Gates of Paradise," do yourself a favor and do it. (The ones on the Baptistry now are replicas, the real ones are in the nearby museum.) And read the Fenton article, "A Lesson From Michelangelo."

On April 18, 2016 at 4:12 PM, Vern Edwards said:

What does "fairness within the acquisition system" mean, and why should fairness be public policy? That question may seem absurd at first, but only because the words "fair" and "fairness" are so widely used and heavily freighted in our society that we rarely ask people who use those terms what they mean by them. And if we did, few could answer clearly and definitely.

I don't think the questions are absurd at all, but at the same time a day of thinking on the issue probably won't result in an adequate answer.  Still, I'll try to provide some thoughts to hopefully move the discussion forward.

First, "fairness within the acquisition system" from a practical standpoint likely depends on the acquisition situation (competitive versus sole source), but from a broad standpoint I'd define it as evenhandedness in business dealings and limiting discrimination/providing maximum practicable opportunity (I say limiting discrimination because I think there are some situations where discrimination may/can result in a more fair outcome, i.e. small business set-a-sides).  Do you have a definition or concept of fairness that you'd like to share?

To answer the second question, I'd argue fairness should be public policy not merely because as a democratic republic the nation has decided as much (what is doesn't necessarily mean that it should be), but rather because participation in financing/supporting government acquisitions is not voluntary in our society.  Unlike corporations, where members of society can influence or show support for the activities of firms through economic behavior, citizens cannot do that when it comes to our government and paying taxes (some try to unsuccessfully, i.e. tax-resistors).  This means that unlike corporations, a government, by its very nature, has social obligations and to fulfill those obligations a just government does so in a fair manner (some of my thoughts regarding this position remind me of John Rawls' work in A Theory of Justice).  It's rather interesting that not just on this forum, but on the political landscape there are a plethora of calls to make government run more like a business (I can just hear Donald Trump shouting now).  So it's obvious that many others believe a government should be as efficient or as effective as possible and that fairness (as well as other principles) should take a backseat, but I guess I believe in a principled/bounded approach that tries to maximize our operating capabilities within that construct.  Essentially, that's the heart of the issue here - what do we believe is the function of government

On April 18, 2016 at 4:12 PM, Vern Edwards said:

I can't help but think that what you call "fairness" is nothing but a political sop that has little if anything to do with good business practice and outcomes. Consider this. GSA just reported in the Federal Register that:

• 5.6% of all FSS contractors received 80% of all sales;
• the top 20% of FSS contractors accounted for 92.5% of FSS sales; and
• only 2.6% of FSS contractors reported more than $1 million in FSS sales.

81 FR 21346, 48; April 11, 2016. Is that evidence of unfairness, or does it indicate that the FSS system is a sump of "fairness" waste? Think what it cost to award and maintain those 20,094 active FSS contracts. What price "fairness"?

This isn't an indictment of "fairness" as much as it is an indictment of execution.  I'll never forget the first time I came across my first wasteful GSA pricelist where I saw the XBOX 360 listed on multiple GSA Schedules for $800 (market price at the time was approximately $300).  Some GSA Contracting Officer made that determination of price reasonableness and I'm fairly certain (or hopeful) that no one purchased that item (or the others with inflated prices) for the $800 it was listed at.  I think it is fair to assume that those contractors likely fell into the bottom 80% that received only 7.5% of all sales, but was that because of fairness or because or poor procurement practices on behalf of GSA Contracting Officers?  I don't think we have to shirk the concept of fairness to improve the GSA outcomes listed above.

On April 19, 2016 at 5:38 PM, Vern Edwards said:

For instance, assuming that competition is a good thing, is it always best to allow all responsible offerors an opportunity to compete, instead of, say, three firms prequalified through market research? Allowing all to compete might be the appropriate when buying commodities at the lowest proposed price, but it might not be appropriate when seeking proposals to fulfill a complex requirement.

Is it always best to rely on the competitive bids or proposals processes when selecting a contractor, with their complex and restrictive rules about proposal evaluation and business communications, or might it sometimes be better to select the contractor based on qualifications and then negotiate contract terms one-on-one with the selectee, as in architect-engineer contracting?

Ever since I read about the second approach (I believe this is the same approach you advocated for performance-based services in the Defense Acquisition Review Journal from 2007) I've been intrigued by it (As an aside, a pilot of this or similar procedures could be done through the competitive 8(a) process if they were revised to allow it).  Still, I don't see how the either approach requires less fairness in the process, they just requires different processes.  Would/should we not ensure fairness during the qualifications phases of these alternative acquisition approaches?

This discussion essentially comes down to a matter of priorities.  I want a more efficient and effective acquisition system as much as the next person, but not at the expense of comprising fairness.

So, you are curious about using a qualifications based selection process, then negotiating the contract terms, including price with a selectee? And you think that this will "simplify" or "streamline" the acquisition process? And this negotiation process would be led by or performed by KO's ?  And you think that the competitive 8( a ) process could be a good program on which to try this out?

I am extremely glad that Congress recently headed off attempts to allow expanding the use of qualifications based acquisition approaches, such as was advocated by certain Design-Build construction industry advocates.  

From my observation of the general reluctance of many government acquisition personnel to even engage in detailed discussions during competitively negotiated acquisitions, let alone the often mediocre quality of detailed one on one cost/price negotiations on new contracts or modifications , I don't think that that there is adequate capability within the government workforce to due this on a wide scale.

I definitely see widespread reliance on price analysis techniques to determine reasonableness of pricing for such negotiations, even though we would supposedly also negotiate the technical terms and approaches, which might well mean comparing the price of apples to the database price of oranges or pears. 

One shouldn't have to wonder much why the DoD acquisition policy makers have said that DoD is not to merely rely on the GSA or any agency determinations that established Schedule prices are fair and reasonable. 

When I was assigned to Germany in the 1980's, our Command (and I suspect most of the US military and other US government agencies) relied almost totally on price analysis, comparing proposed prices with historical unit-prices. Almost all construction used unit pricing based upon the German DIN standards for each construction activity.  Reliance on price analysis couldn't detect that there was allegedly widespread price fixing, collusion and kickbacks to certain government officials going on at that time.  The German Government eventually was able to arrest some of their employees and punish some contractors (after I left Germany).  A close German National associate once told me that there was an internal German Government investigation concerning bid rigging and kickbacks and that there was supposedly at least 3% added to all prices in collusion in order to "pay to play".

Deep and meaningful negotiations based upon price analysis only for construction is challenging even for standardized unit price items that the Germans used and was often a joke. 

Shay Assad says that DOD already pays too much. Expanding the use of one on one price or cost negotiations won't improve the situation, in my opinion.  And EXPANDING the use of one on one price or cost negotiations under the 8 ( a)  program and adding negotiation of the technical scope? Whoa, Nellie!  And...Katybar the door!

On April 20, 2016 at 10:38 PM, Matthew Fleharty said:

First, "fairness within the acquisition system" from a practical standpoint likely depends on the acquisition situation (competitive versus sole source), but from a broad standpoint I'd define it as evenhandedness in business dealings and limiting discrimination/providing maximum practicable opportunity (I say limiting discrimination because I think there are some situations where discrimination may/can result in a more fair outcome, i.e. small business set-a-sides).  Do you have a definition or concept of fairness that you'd like to share?

Well, if you're going to argue for fairness, either in the contractor selection process or in contract pricing, then the assessment of your argument depends on what you mean by fairness. You've traded one vague term for another: "evenhandedness." We all know what those things mean generally. What we don't always know is what they mean to particular people in specific circumstances. 

Do I have a definition of fairness? No, which is why I rarely use the word and why I don't think it makes sense to talk of fairness in the context of government contracting. It's a political word, not a business word. If the government wants to do politics when it buys things, well, I'll go along with the program. But why not do business, instead?

I know what the rules require, and I presume that those rules are the government's standard for fairness, whatever it is: full and open competition unless otherwise permitted; equally meaningful discussions with all offerors within a competive range; decisions based solely on the stated evaluation factors, etc. I object to particular rules for particular reasons. If someone says that fairness is adherence to rules to which I object, then I object to fairness.

What I want to know is why the rules should be based on something as vague as "fairness." Consider this: The Bonneville Power Administration (BPA), which is part of the Department of Energy, is not subject to the FAR and to most of the statutes in Title 41 of the United States Code. It follows the Bonneville Purchasing Instructions (BPI) instead of the FAR, and in so doing It takes a different approach to contract formation in a competitive procurement. See BPI 12.6, Source Selection:

Quote

(a) The CO’s award decision shall be based on an assessment of the proposals against the evaluation factors identified in the solicitation. While the CO may utilize information and analyses provided by the evaluation team or others, the award decision shall represent the CO’s independent judgment. The award decision will be documented in the official file as identified in BPI 12.8.2, and shall include the justification for any business judgements and tradeoffs made or relied upon by the CO.

(b) The CO will generally select only the top-ranked firm for final negotiations. For award decisions based on lowest price technically acceptable offers, BPA shall negotiate only with the offeror which, after evaluation of all offers, represents the lowest price technically acceptable offer. For award decisions based on a tradeoff analysis, the CO may communicate with more than one firm in order to obtain enough information to narrow the field of competition. In the case of closely ranked offers, BPA may negotiate with more than one firm concurrently. However, this practice is generally discouraged in order to minimize administrative costs for offerors and BPA.

(c) Based on the quality of offers received and BPA's objectives, the evaluation team may develop different source selection strategies prior to the selection of the final source(s) for negotiation.

(d) If negotiations with the selected firm are unsuccessful, the CO may close negotiations and initiate negotiations with one or more other offerors.

Here is the rule about negotiations, BPI 12.7:

Quote

Negotiation is the process of discussing with offerors their proposals, terms, conditions, price, BPA specifications, and other requirements. The objective of negotiations is to establish a clear understanding of both parties' positions and reach contractual agreement. 

12.7.1 Policy 

(a) Emphasis shall be placed on person-to-person negotiations which lead to close understanding between BPA and the offeror. This does not preclude written agendas for discussions or written questions and answers to items of negotiation. Following negotiations, the CO shall ensure that the written contract accurately reflects the agreement between the parties. 

(b) Although detailed negotiations will typically be concentrated after source selection, the CO may negotiate, resolve mistakes, or obtain clarifying information at any time. For example, selected offerors may be asked to provide an oral presentation at any time the CO feels it would be helpful. BPA has no obligation to negotiate with all firms. 

(c) Under no circumstances will BPA: 

(1) Favor one offeror over another; 

(2) Reveal an offeror’s technical solution, unique or innovative approach, or any information that would compromise an offeror’s intellectual property; or 

(3) Reveal an offeror’s price information without that offeror’s permission.

(d) Auctioning techniques (i.e. creating an auction-like atmosphere which encourages a price “bidding war” between competing contracts) are allowed only when a Strategy Panel or the Tier II Purchasing Manager (or designee), and the HCA have determined that business conditions exist such that a reverse auction is the optimum means for acquiring pricing information from the identified technically acceptable offerors. A reverse auction shall not be used to acquire technical, performance, or other business information. See BPI 11.11.1.1.1.

Those strike me as much more sensible and businesslike policies and procedures than what we find in FAR 15.306 and 15.307. No clarifications/communications/discussions distinction. No competitive range. No weaknesses and deficiencies and all that other hoorah. But if government agencies under the FAR wanted to do something like that, they'd have to resort to establishing a competitive range of one, which some of them are afraid to do. Even if they did it, they'd be very limited in how much negotiating they could do without amending the RFP and going back out in accordance with FAR 15.206. BPA has not established any such limitations on the conduct of negotiations after source selection. Here is BPI 12.3, Changes in Requirements After Receipt of Offers, 12.3.1, Policy, paragraph (a):

Quote

If there are substantial changes in BPA's requirements after offers are received, the CO may reconsider any offers previously eliminated. The CO shall notify such offerors of the changes only if the changes would materially improve their potential for award. The solicitation need not be canceled.

The BPI gives BPA's COs a lot more discretion than FAR gives other government COs. It's not clear whether the notification requirement applies after source selection. I would say that, reading the BPI as a whole, it doesn't. The GAO does handle protests against BPA procurements, but applies the standards of the BPI. GAO has not decided a BPA protest since 2003, and has never decided a BPA protest on this issue. The COFC has not handled a BPA bid protest since 1983, which was before the BPI was adopted.

Now, instead of arguing whether a procedure is "fair," why don't Congress and the FAR councils ask themselves whether the procedure makes good sense to prudent businesspersons and, if it does, why don't they authorize its use by all COs?

Our competitive contractor selection/contract formation procedures are still grounded in 19th Century "competitive bidding."

Kudos on the mention of Rawls, by the way. I'm seriously impressed!

joel hoffman said:

From my observation of the general reluctance of many government acquisition personnel to even engage in detailed discussions during competitively negotiated acquisitions, let alone the often mediocre quality of detailed one on one cost/price negotiations on new contracts or modifications , I don't think that that there is adequate capability within the government workforce to due this on a wide scale.

Joel, I agree with your concluding remark. But indications are that there is not "adequate" capability within the government workforce for the conduct of many contracting procedures to a high standard. There are, however, solutions that involve training and work assignments. If a procedure is inherently sound, then we should not reject it because we do not currently have adequate capability.

Vern, thank you for engaging in the discussion and for the design competition article.

You're right to an extent and I knew a day of thinking about the issue and my limited remarks would make it difficult (if not impossible) to establish a sound definition of fairness because there are inherent complications in doing, such as different beliefs regarding fairness.  For example, does one care more about fairness as a process or as an outcome (I think this is the distinction you drew when you asked about fairness to the taxpayers)?  Philosophers have tried to address the concept of fairness with much more time and brainpower than I have dedicated to it over the past few days and yet I still do not believe we have an agreed upon standard for "fairness" (otherwise I would cite it here); however, one thing I do believe is that fairness should not be defined as adherence to the rules because a rule can be unfair/discriminatory/exclusionary.

I'm also curious that if the vagueness of the term "fairness" is a concern, all things considered, how is business judgment any less nebulous?

joel hoffman said:

So, you are curious about using a qualifications based selection process, then negotiating the contract terms, including price with a selectee? And you think that this will "simplify" or "streamline" the acquisition process? And this negotiation process would be led by or performed by KO's ?  And you think that the competitive 8( a ) process could be a good program on which to try this out?

I am extremely glad that Congress recently headed off attempts to allow expanding the use of qualifications based acquisition approaches, such as was advocated by certain Design-Build construction industry advocates.  

From my observation of the general reluctance of many government acquisition personnel to even engage in detailed discussions during competitively negotiated acquisitions, let alone the often mediocre quality of detailed one on one cost/price negotiations on new contracts or modifications , I don't think that that there is adequate capability within the government workforce to due this on a wide scale.

Shay Assad says that DOD already pays too much. Expanding the use of one on one price or cost negotiations won't improve the situation, in my opinion.  And EXPANDING the use of one on one price or cost negotiations under the 8 ( a)  program and adding negotiation of the technical scope? Whoa, Nellie!  And...Katybar the door!

Joel, I don't recall ever using the words "simplify" or "streamline" in my remarks.  I'm curious about a number of acquisition methods/proposals and the one espoused by Vern in his 2007 article is quite interesting (I assume you've read it).  I only offer the idea of testing it under the 8(a) program on the competitive side because we already do something similar for sole source 8(a) awards so it wouldn't be a total culture shock to apply his concept to the competitive side of the 8(a) process as a test program of sorts.  Do you propose an alternative way to test the procedures?  I agree with Vern's response that "if a procedure is inherently sound, then we should not reject it because we do not currently have adequate capability."  Such concerns (though I don't entirely agree with you), is also why I advocated the use of it on a test basis first.

Matthew:

I think business judgment gives us a reasonably clear and almost universal standard:

What a similarly situated and honest businessperson would do to survive and to achieve long term growth and profitability.

The achievement of those objectives depend on the prudent management of customer relations, worker relations, supplier relations, community relations, competitive strategy and its execution, capital management, and operational efficiency, the demands of which must be kept in balance. And all of those require ever better knowledge and skill.

The standard for "fairness" is much more sketchy and elusive, at least to me.

Matthew Fleharty said:

I'll never forget the first time I came across my first wasteful GSA pricelist where I saw the XBOX 360 listed on multiple GSA Schedules for $800 (market price at the time was approximately $300).  Some GSA Contracting Officer made that determination of price reasonableness and I'm fairly certain (or hopeful) that no one purchased that item (or the others with inflated prices) for the $800 it was listed at.  I think it is fair to assume that those contractors likely fell into the bottom 80% that received only 7.5% of all sales, but was that because of fairness or because or poor procurement practices on behalf of GSA Contracting Officers?  I don't think we have to shirk the concept of fairness to improve the GSA outcomes listed above.

This statement alone indicates to me that you really don't know what you are talking about, at least as it pertains to Schedules, pricing, and FAR Part 8.  That this was listed at this price is only an indication that the market rate for the item was that at a particular time.  Prices for IT decrease over time.  The CO at GSA established the fair price for that item at a time when that was the market rate of $800 (which it was when it was initially released).  That price point decreased over time, as it typically does for consumer electronics.  You characterize this as the fault of a GSA CO, whereas this is nothing more than the market at work.  Your cell phone that you pay $600-$700 today will be worth .99 in 12 months.  This is not the fault of a CO that sets a market price at a particular point in time, it is simply the way that the IT market works, and has nothing to do with your "fairness" argument.

You are correct that nobody pays this anymore, just like nobody pays $600 for an iPhone 4.  Market research will bore this out, just as it did in your example above.  When you use schedules, you still do your research, and negotiate a price.

Matthew Fleharty said:

Joel, I don't recall ever using the words "simplify" or "streamline" in my remarks.  I'm curious about a number of acquisition methods/proposals and the one espoused by Vern in his 2007 article is quite interesting (I assume you've read it).  I only offer the idea of testing it under the 8(a) program on the competitive side because we already do something similar for sole source 8(a) awards so it wouldn't be a total culture shock to apply his concept to the competitive side of the 8(a) process as a test program of sorts.  Do you propose an alternative way to test the procedures?  I agree with Vern's response that "if a procedure is inherently sound, then we should not reject it because we do not currently have adequate capability."  Such concerns (though I don't entirely agree with you), is also why I advocated the use of it on a test basis first.

What would be your objective is using a qualifications based 8( a ) selection procedure then negotiating the contract price, similar to the A-E acquisition method?  Lower cost than competitively negotiated?  Not from my experience over the years. Faster award process?  Not from my experience with both.

My staff and I personally negotiated numerous sole source, 8 ( a ) construction contracts and conducted negotiated 8 ( a ) set-aside and Disadvantaged Business set-asides, during an assignment in the early to mid 1990's.  We had to hold many developing firms' hands throughout the acquisition process, then throughout the contract execution. 

Perhaps negotiating 8(a) service contracts is simple.

jonmjohnson said:

This statement alone indicates to me that you really don't know what you are talking about, at least as it pertains to Schedules, pricing, and FAR Part 8.  That this was listed at this price is only an indication that the market rate for the item was that at a particular time.  Prices for IT decrease over time.  The CO at GSA established the fair price for that item at a time when that was the market rate of $800 (which it was when it was initially released).  That price point decreased over time, as it typically does for consumer electronics.  You characterize this as the fault of a GSA CO, whereas this is nothing more than the market at work.  Your cell phone that you pay $600-$700 today will be worth .99 in 12 months.  This is not the fault of a CO that sets a market price at a particular point in time, it is simply the way that the IT market works, and has nothing to do with your "fairness" argument.

Jon, at no time did the cost of an XBOX 360 ever reach $800 for the market (http://money.cnn.com/2005/08/17/commentary/game_over/column_gaming/).  Provide me evidence of such and then maybe you can tell me that I don't know what I'm talking about.  I understand how markets work, but I don't understand how you can make the assumptions you do in your post and claim I'm being ignorant or naïve in my remarks.  Sure it may be only one example (one that has stuck with me), but I think you would find a number of additional examples of inflated or unreasonable prices on GSA schedules if you took just a small amount of time to research the issue before posting (http://www.rjo.com/PDF/law360_12182013.pdf or https://www.justice.gov/usao-md/pr/axway-inc-agrees-pay-62-million-resolve-false-claims-act-allegations-related-gsa-multiple or even http://www.law360.com/articles/219983/fastenal-to-pay-6-25m-after-inflating-fastener-prices and those only took me a few minutes).

jonmjohnson said:

You are correct that nobody pays this anymore, just like nobody pays $600 for an iPhone 4.  Market research will bore this out, just as it did in your example above.  When you use schedules, you still do your research, and negotiate a price.

Are you sure?  You're telling me that the thousands of "buyers" with GPCs who order off of GSA Schedules do precisely that (especially under the micropurchase threshold)?  I doubt it because I've seen evidence to the contrary and advised my customers on how they can do better.  But that is besides the point here....even if buyers do what you state, that doesn't disprove that at some point in time a GSA CO determined the inflated price on the pricelist to be fair and reasonable.  Having not worked at GSA, I hesitate to presume why, but I have my thoughts on how it occurs.  Still, the inflated GSA Schedule prices, combined with laziness by purchasing officials, buyers, and even contracting officers likely resulted in the following deviation to 8.404(d):

Quote

(d) Pricing. Supplies offered on the schedule are listed at fixed prices. Services offered on the schedule are priced either at hourly rates, or at a fixed price for performance of a specific task (e.g., installation, maintenance, and repair). GSA has already determined the prices of supplies and fixed-price services, and rates for services offered at hourly rates, under schedule contracts to be fair and reasonable. Therefore, ordering activities are not required to make a separate determination of fair and reasonable pricing, except for a price evaluation as required by 8.405-2(d). By placing an order against a schedule contract using the procedures in 8.405, the ordering activity has concluded that the order represents the best value (as defined in FAR 2.101) and results in the lowest overall cost alternative (considering price, special features, administrative costs, etc.) to meet the Government's needs. Although GSA has already negotiated fair and reasonable pricing, ordering activities may seek additional discounts before placing an order (see 8.405-4).

(d) Pricing. (DEVIATION) Supplies offered on the schedule are listed at fixed prices. Services offered on the schedule are priced either at hourly rates, or at a fixed price for performance of a specific task (e.g., installation, maintenance, and repair). GSA has determined the prices of supplies and fixed-price services, and rates for services offered at hourly rates, to be fair and reasonable for the purpose of establishing the schedule contract. GSA's determination does not relieve the ordering activity contracting officer from the responsibility of making a determination of fair and reasonable pricing for individual orders, BPAs, and orders under BPAs, using the proposal analysis techniques at 15.404-1. The complexity and circumstances of each acquisition should determine the level of detail of the analysis required.

Vern Edwards said:

I think business judgment gives us a reasonably clear and almost universal standard:

What a similarly situated and honest businessperson would do to survive and to achieve long term growth and profitability.

I have some thoughts here, but before I respond, would you apply this definition to Government activities (where profitability is not a concern) or do you have an alternate definition specific to business judgment for Government officials?

Matthew,

The term "business judgment" is used in FAR 1.102( d ).

Matthew Fleharty said:

I have some thoughts here, but before I respond, would you apply this definition to Government activities (where profitability is not a concern) or do you have an alternate definition specific to business judgment for Government officials?

I would apply those criteria in judging the conduct of government activities, yes. Although the government does not seek profit or business growth, the behavior that leads to profit and growth includes consideration for the interests of the owners of the business (the taxpayers), consideration for those receiving your service, consideration for those who supply and service your operations, prudent capital investment and expenditure, work efficiency, economic consumption of resources, planning, strategizing, etc., etc. Those values are equally beneficial in government contracting ops. Or think of it this way: every time an agency satisfies a government requirement at a marginal avoidance in the expenditure of another tax dollar, it has made a buck in "profit."

Availability of gaming consoles, during launch (initial release), is scarce, which drives prices up. $800 for an XBOX 360 was fair and reasonable for a time.

http://www.gamespot.com/articles/xbox-360-scalpers-clean-up-on-ebay/1100-6140373/

joel hoffman said:

What would be your objective is using a qualifications based 8( a ) selection procedure then negotiating the contract price, similar to the A-E acquisition method?  Lower cost than competitively negotiated?  Not from my experience over the years. Faster award process?  Not from my experience with both.

My staff and I personally negotiated numerous sole source, 8 ( a ) construction contracts and conducted negotiated 8 ( a ) set-aside and Disadvantaged Business set-asides, during an assignment in the early to mid 1990's.  We had to hold many developing firms' hands throughout the acquisition process, then throughout the contract execution. 

Perhaps negotiating 8(a) service contracts is simple.

Joel:

You need some context for Matthew's remarks. Have you read that article in Defense ARJ that prompted Matthew's comments? It's "A Proposal For A New Approach to Performance-Based Services Acquisition"? It's here:

http://www.dau.mil/pubscats/pubscats/arj45/ARJ45_Edwards.pdf

I think it will provide the answers to many of your questions. Please take a pause and read it carefully and with an open mind.

Jamaal Valentine said:

Availability of gaming consoles, during launch (initial release), is scarce, which drives prices up. $800 for an XBOX 360 was fair and reasonable for a time.

http://www.gamespot.com/articles/xbox-360-scalpers-clean-up-on-ebay/1100-6140373/

Maybe the GSA buyer/CO were provided that article (or one similar) and the subsequent eBay sales data when they made their determination.  A common definition of fair and reasonable price includes the term prudent which is defined as "acting with or showing care and thought for the future."  Even with the early release demand during a holiday season, I'd argue that the determination was made inappropriately by such a standard.

Edit: Still, thanks Jamaal for actually providing evidence that could serve as the basis for why the price might have been listed on those GSA Schedules as it was.

Matthew:

Seems as though the GSA CO is being measured against an objective standard, without having regards to the circumstances and to the discretion that would reasonably be expected of a prudent person in similar circumstances. A prudent person given the facts and circumstances, acting with or showing care and thought for the future, could find a range of prices fair and reasonable.

At launch, would it have been appropriate to make a schedule at MSRP? Would that be fair to suppliers who had to fill any and all orders at that price? I'm not really looking for an answer, just saying. Maybe delaying a schedule contract until prices normalized would have been better ... who knows? I think you can make your argument stick and I agree with a lot if not most of what you have to say on GSA. I just don't think its "fair" to Monday morning quarterback CO's decisions without adequate information regarding the situation or how they arrived at their decision. Only reason I knew of the inflated prices is because, over the years, I've purchased several consoles through the madness of launch and worked at a video game store once upon a time (best job ever)!

Anybody have a definition for 'prudent person'? I came across a really good one before, but cant recall where - it included a requirement to have a reasonable knowledge of the marketplace.

For discussion, what is a CO's standard of care, if any?

Matthew Fleharty said:

Maybe the GSA buyer/CO were provided that article

Here is exactly where you go wrong.  GSA is not the buyer of anything.  You are the buyer.  GSA just established a structure whereby you can do as Vern suggested earlier:  1) do you homework, 2) pick 3 vendor, 3) compete the pricing, and 4) make an award.

Here is how pricing under schedules is established.

A vendor provides the pricing information needed for a contracting officer to make a determination that that entity is selling a particular product.  It could be a direct manufacturer, but more often than not we are talking resellers, particularly in federal IT.  The basis of pricing cannot include pricing given to universities, state or local govermnent, or other federal agencies.  Also, although a GSA CO can ask, a supplier is required to give the government pricing equal or better than their "most favored customer" pricing.  This absent of spot discounts, credits, or any other mechanism a supplier can use to lower the total commercial price.  A CO may try to elicit significant discounts, but a vendor is not required to give them.  Why?  There is no work associated with the schedule award.  How much of a discount would you provide someone for no work?  Where does the discounting happen then?  At the task order level, and the level of discounting is affected by the task order term and conditions.

The GSA CO determines a fair and reasonable price, based on the commercial entities commercial practices that they justify and provide evidence for, in order to allow for an item to be placed on their schedule contract.  These are ceiling prices that are established, or MSRP for government.  They are not, nor have they ever claimed to be, floor pricing as would be given to a buyer who has money and is ready to make a buy.

GSA from my understanding has been involved in an effort to try and scrub their systems of the pricing scenarios that you describe above, so they appear aware of this.  That being said, if any government-wide purchase holder is spending current generation prices for a 2nd or 3rd generation technology, then that agency deserves exactly what they get.  As much as folks try, you cannot legislate or regulate carelessness, laziness, or stupidity.

On another note, when is the government going to start accounting for transaction costs, transition costs, and opportunity costs associated with federal contracting?  Are we spending 8 to save 5 and calling that a victory?  If that is the case, have we really gone away from the $200 toilet seats and $90 hammers of the 1980's?  Start adding up the costs, and with contracting penchant for making complex the essentially simple, we are no better off now than we were then.

jonmjohnson said:

Here is exactly where you go wrong.  GSA is not the buyer of anything.  You are the buyer.  GSA just established a structure whereby you can do as Vern suggested earlier:  1) do you homework, 2) pick 3 vendor, 3) compete the pricing, and 4) make an award.

The GSA CO determines a fair and reasonable price, based on the commercial entities commercial practices that they justify and provide evidence for, in order to allow for an item to be placed on their schedule contract.  These are ceiling prices that are established, or MSRP for government.  They are not, nor have they ever claimed to be, floor pricing as would be given to a buyer who has money and is ready to make a buy.

Jon, I never said that a buyer shouldn't do the things you say - what I do say, and you once again ignore, is that GSA COs have a responsibility when making fair and reasonable determinations on price lists and I've seen first hand (and provided additional examples) where that was done poorly or improperly.  Call it what you want, even if it is a "ceiling" the GSA CO should make sure that "ceiling" is fair and reasonable.  I'm done discussing this matter with you because you once again conveniently ignore what I've said and the examples I provided.

Matthew:

It appears that your interest has shifted from the question of whether contracting policy and operations should be grounded in fairness or business judgment to your squabble with Jon and Jamal about X-Box pricing under GSA FSS contracts. I'm leaving the thread.

Vern Edwards said:

Matthew:

It appears that your interest has shifted from the question of whether contracting policy and operations should be grounded in fairness or business judgment to your squabble with Jon and Jamal about X-Box pricing under GSA FSS contracts. I'm leaving the thread.

It hasn't - my thoughts regarding our discussion are not yet complete.  The squabbling doesn't require the critical thought that our discussion takes - I'll respond sometime today.

I think Vern hit on something in talking about government business and what that means for contracting ops.

Our Government's business goals and objectives are similar to not-for-profit organizations. Where for-profit organizations are largely driving by money, namely profit, the Government should measure success, in part, by how well it satisfies its internal and external customers and how well it advances the causes it champions. All organizations have to consider sustainability and/or growth.

Still seems the acquisition process could gain efficiencies by dropping "fairness" and adopting affordable. Affordable can be clearly and easily defined for any requirement.

Jamaal:

Nonprofit organizations are very much driven by money. They are some of the most money-driven organizations I know. In any case, I'm not sure that they operate much differently than profit making organizations. See Lee, "The Business Judgement Rule: Should It Protect Nonprofit Directors?" Columbia Law Review, (May 2003).

Quote

Historically, nonprofit directors were regarded as trustees with a correspondingly strict standard of care in their management of a public trust. Trustees, as remains the case today, were expected to exercise rea- sonable care and skill, whereby findings of ordinary negligence resulted in personal liability. As the nonprofit landscape changed over the years, however, legislatures and courts began replacing trustee precepts with corporate governance principles, often with little or no alteration.

Through this process, nonprofit directors in some jurisdictions gradually came to benefit from the substantial leeway courts allow corporate directors in their management decisions, which enjoy the protection of the common law business judgment rule.9 For a variety of reasons justifiable in the business context, the rule precludes courts from second-guessing directors' decisions as long as they are rational, not self-interested, and made in good faith on an informed basis." In essence, the business judg- ment rule only punishes instances of gross negligence, as opposed to the trustee standard, which attaches liability for ordinary negligence.

It is highly questionable whether nonprofit directors warrant the extraordinary latitude bestowed upon for-profit directors when, in theory at least, the mission statements of their respective organizations lie at opposite ends of the spectrum. Despite this fact, courts have inched toward the rule's acceptance in the nonprofit context, but still have not defini- tively determined whether the rule should apply or, alternatively, whether ordinary negligence should suffice to constitute a breach of the nonprofit director's duty of care.

The courts have moved even further since that article was written. There are more than one hundred law review articles that discuss expanding application of "the business judgement rule" to nonprofits. As used in those articles, "the business judgement rule" is a legal standard and not exactly what I've been talking about, but the ideas are related.

In order to make your case, you'll have to make a clearer and more relevant distinction between for-profits and nonprofits and their standards of operation than the rather vague one you made in your last post. Do you think for-profits aren't interested in satisfying customers and furthering causes?

Poor execution on my part - I agree that some nonprofits are money-driven, especially with regard to certain compensation and benefits packages. I have some personal feelings toward The Wounded Warrior Project and others like it. I was mainly talking about the business operations goals and objectives (not to include excessive employee or executive compensation per se). If the goals and objectives differ maybe the processes and approaches to fulfilling them should differ?

To answer your question - I think for-profits are interested in satisfying customers and furthering causes, albeit for different reasons with different goals and objectives.

Thanks for the share - off to do more thinking.

Jamaal Valentine said:

I agree that some nonprofits are money-driven, especially with regard to certain compensation and benefits packages. I have some personal feelings toward The Wounded Warrior Project and others like it. I was mainly talking about the business operations goals and objectives (not to include excessive employee or executive compensation per se).

Jamaal:

I think that nonprofits work to make money. They make it through donations, dues, and sales. Some nonprofits sell stuff, you know. That's one of their operational goals. My wife and I are members and volunteers for the Audubon Society, and I can tell you that they sell all kinds of stuff to make money. They just put what they make back into their operations instead of distributing it to their owners. Read up on nonprofits.

Vern

Concur with Vern's comments about NFP entities. I have done some work with NISH entities (or AbilityOne or whatever they call themselves today). Let me tell you, they are very focused on revenues and costs and cash flow -- the same things that Boeing, LockMart, Raytheon, etc. are focused on. They have marketing departments and program managers and financial analysts and IT departments -- just the same as any for-profit company of comparable size. Compensation and benefits tend to be comparable as well, as least among the larger NFPs.

The difference, as Vern noted, is that "profits" (the difference between price and costs) is not distributed to owner(s) but, instead, returned to the entity for use in furthering the mission. To be clear: on a project-by-project basis, there is definitely a profit or loss; the difference is that project profit is reinvested in the business and not distributed via dividends or other means.

Again, I agree. I was thinking that the differences mentioned can shape contracting operations. Or are for-profits and nonprofit/not-for-profit supply chains essentially run the same?

I think nonprofits are run similarly to the Government. It all takes money, but what they do with that money is a distinguishing factor. Since nonprofits - like the Government - aren't concerned with distributions to owners (shareholders) their goals and objectives are different from for-profits. One less consideration in capital allocation. By nonprofits putting the money generated back into their operations instead of distributing it to their owners the can go about business differently.

I think of my personal shopping experiences I have witnessed great disparities in pricing schemes of for-profits and nonprofits:

- Nonprofits consisting of one person selling items at cost in an effort to generate enough money to stay afloat and raise awareness

- Complex nonprofits selling items or providing services to generate money to help a cause

- For-profits selling items at 177,475 percent over cost - presumably in an effort, partly, to increase distributions.

In my experience for-profits leverage supply chains to maximize profits (distributions or compensation to shareholders, officers, and directors). Outside of volunteer efforts, I've never worked for a nonprofit, but I wonder if nonprofit supply chains operate under the same principles as for-profits. Intuitively, I feel they place a greater emphasis on operational efficiency (affordability and budget) versus increasing profits. 

I can likely find the answer by doing as you stated - reading up on nonprofits and breaking out the old finance books and looking over capital allocation.

Girl Scout cookies?  There is nothing "charitable" in the marketing and business plan for Girl Scout cookies -- maximizing profits is the goal -- true, the profits are not taxable and are used for a good cause, but there is a pure profit motive there.

There is an interesting article in the online Defense News today that shows how the cult of "fairness" has hurt the government. See "As Pentagon Dawdles, Silicon Valley Sells Its New Tech Abroad," by Patrick Tucker. http://www.defenseone.com/technology/2016/04/pentagon-dawdles-silicon-valley-sells-its-newest-tech-abroad/127708/?oref=d-topstory

Quote

CEOs said the sluggish pace of Pentagon contracting is preventing commercial tech firms from responding to the entreaties of Defense Secretary Ash Carter and other DoD players. Prime contracting processes can take a decade, far longer than Silicon Valley investors are willing to wait for a return on their investment.

“They don’t want a sale cycle that’s [even as long as] nine to 18 months,” Charvat said. “So just think of that in the context of the prime contract process with the United States government that can take a decade. A decade from now they [the investors] expect us to have exited this company. They expect an acquisition or an IPO. They expect to no longer be primary shareholders in my company.”

But a company can’t just find a military outfit that needs its product and ring up a sale. Such a transaction requires a no-bid, or “sole source,” contract. And those come with a lot of unattractive demands.

“In order to justify a sole-source contract you have to write down why what you do…is so unique,” Charvat said. “And they want you to go into the kind of detail that would make a patent officer blush. That’s a huge IP [intellectual property] concern because what they also want to do is show this to all these other companies and see if they can do it too. Well, no, no, no.”

She said she walked away from a recent sale when military buyers wanted her to put too much proprietary information in a white paper.

We need modern laws and regulations for modern markets. CICA is based on thinking that is grounded in 19th Century competitive bidding. Pricing rules like TINA are grounded in the mentality that companies that sell to the military are wartime profiteers.

CO education and training needs to be greatly improved so as to develop a crop of genuine businesspersons, who should then be given the freedom and authority to exercise sound business judgement.

"Fairness" is killing us.

Further to Vern's thoughts, a Google search on DOD + Innovation returns some interesting discussion points. Here's one, for example --

http://www.apogeeconsulting.biz/index.php?option=com_content&view=article&id=1045:the-quest-for-innovation&catid=1:latest-news&Itemid=55

The paradox of fairness is that you can never be fair to everybody.  The current rules are skewed in favor of fairness to vendors.  But, that fairness comes at the expense of inefficiencies that harm taxpayers and customers.  That's unfair to them.   And I don't believe there's can be a middle ground where we're objectively maximizing fairness to everybody.

If you're for fairness (however it's defined), you have to ask, "fairness for whom?"  As it's currently implemented, it fairness for the vendors at the expense of others.  Given the realities of the squeaky wheel and regulatory capture, how can it be otherwise?

It's been probably 20 years since I read the book, but I think I first heard of the fairness vs. efficiency argument in Steve Kelman's,"Procurement and Public Management."  I read it when he was nominated to the OFPP.  It was exciting reading it at the time, though there was never a real drive to implement its principles.  I don't suppose there was ever really a chance.

David Bodner said:

The paradox of fairness is that you can never be fair to everybody.  The current rules are skewed in favor of fairness to vendors.

I'm going to have to go ahead and disagree with you there. Ask any small business. In fact, I have a small business in mind -- and you don't need to ask; you can read that small business' opinion regarding acquisition fairness, in great detail. The business has many relevant blog posts on the topic.

https://quimbasoftware.wordpress.com/author/quimbasoftware/

H2H:

Is that a reflection of the rules not being in favor of fairness to vendors or individuals who are incompetent or rogue?

Jamaal,

We are dealing with "fairness" and it's about perception more than reality, in my view. Small businesses commonly perceive that the rules are rigged against them. Many DOD contractors commonly perceive that the role of DCAA is to reduced negotiated profit after completion of performance. Is that reality? Doesn't matter -- it's a common perception.

Personally I believe the the transition from SBIR Phase I to Phase 2 (typically moving from FFP to CP contract type) is extremely difficult for small businesses. Is it "fair"? Maybe, in the sense that the rules apply to every business making that transition. But to the SB who suddenly has to deal with a huge change in management approach, it does not feel "fair".

Shrug. My comment is basically that the vendors do not feel the rules are biased in their favor. How can we analyze a feeling?

here_2_help said:

I'm going to have to go ahead and disagree with you there. Ask any small business. In fact, I have a small business in mind -- and you don't need to ask; you can read that small business' opinion regarding acquisition fairness, in great detail. The business has many relevant blog posts on the topic.

https://quimbasoftware.wordpress.com/author/quimbasoftware/

The COFC made two decisions based on the story told in the blog post to which H2H provided a link:

• Quimba Software, Inc. v. U.S., 120 Fed. Cl. 107 (12-142C, March 25, 2015)
• Dourandish v. U.S., 120 Fed. Cl. 467 (14-937C, March 25, 2015) (Dourandish is the "Bob" in the blog post.)

The Court of Appeals for the Federal Circuit denied the appeal from Dourandish v. U.S. See Dourandish v. U.S., 629 Fed. Appx. 966 (Oct. 20, 2015). It appears that the plaintiff represented himself in court, which is always a mistake.

I'm ready to be corrected by H2H, but until I am it appears to me that the blog entry is a rant by a clueless person who decided to wander about in a world where he had no business being without a guide, i.e., a competent government contracts accountant and a competent government contracts attorney.

A lot of small business persons want to do government contracting work on-the-cheap, hoping to strike the mother lode of business deals. Rather than pay to properly prepare themselves to tangle with a behemoth, they seek free advice at websites like Wifcon or from seminar instructors whom they call or email weeks or months after attending to seek free help. Remember me? I took your seminar last year and I'm having trouble with DCAA and I wonder if you have time to answer a quick question.... (It's always "quick.") I am not sympathetic. I will never write a book entitled Government Contracting for Dummies or The Idiot's Guide to Government Contracts, because dummies and idiots don't belong in that world.

Ironically, the rules on which the Quimba/Dourandish decisions are grounded are written down in order to be fair to contractors by putting them on notice. The contractor, either unaware of the rules or unable to interpret them properly, screwed up and then wasted his and taxpayer money by seeking "relief" in court. I pity the poor contracting officer who stumbles upon a fool masquerading as a "contractor."

Vern,

My post was about perception and feelings. I provided a link to one small business who perceived -- felt -- that it was wronged. You are discussing reality and the rules and what happens when you run afoul of the rules. You are not wrong ... but that misses my point. It's not about whether Quimba's perceptions were correct; it's about my assertion that those perceptions, to one extent or another, are widespread within the SB community.

Disclosure: At one point I was hired by Quimba to advise on the validity of a government counter-claim. So I know more about the situation than I'm allowed to say. I simply cannot get into it other than to post the link to the blog.

H2H:

Understand.

Vern

Vern,

Apologies for the delay.  Just as I thought I knew what to say in my response, I read the latest CNR and the thought occurred to me that we may be "argreeing" (arguing, but in agreement) at least when it comes to the subject of fairness and business judgment in the contractor selection phase.  You stated in "Highest Technically Rated Offerors with Fair and Reasonable Pricing: A New Source Selection Technique" 30 No. 5 NCR. NL ¶ 23:

Quote

The only part of CICA worth preserving is the part that calls for some level of competition and justification and approval for the lack thereof.  The rest of CICA, which calls for the use of specific competitive procedures, needs to go.  Those sections should have been repealed long ago and the case law based on them sent to the rubbish heap.  Agencies should have been freed from the tyranny of the awful FAR Part 15 source selection procedures in the mid-1990s.  There are many ways to select contractors and form contracts with them.  Why should agencies be straightjacketed the way that they are, especially in this era of seemingly never-ending calls for critical thinking and innovation?

While I may take exception to the phrase "some level of competition" depending on the specifics, generally, I support the preceding comments as follows.  Unless I'm reading too far into them or outright misunderstanding your position, it appears that any exceptions to the standard of competition would not be based on business judgment, but rather on justifications and approvals tied to statutory exceptions (similar to the status quo).  Business judgment could then be used to fashion/employ various techniques to select a contractor to fulfill the Government's requirement.  I'd support that type of acquisition environment as those techniques need not be uniform throughout the DoD (or any agency) to provide for fairness as long as that process allows for competition to the maximum extent practicable and equal treatment of similarly situated or like offerors.

Still, I'm left a bit concerned.  I've read on numerous occasions your (and others') indictments of the acquisition system, the lack of training and professionalism, and the overall youth and inexperience of the workforce and can't help but wonder: if the Government acquisition workforce isn't well trained, can't critically think, write well, etc. would they not do more harm in a world where they have this wide-latitude afforded to them by invoking business judgment?  Forgive me in advance for what might be an oversimplification of the matter, but I'm reminded of a comical scene in the movie The Big Short where the investors are talking to two mortgage brokers in Florida about their process for issuing homebuyers loans and these brokers' "business judgment" (the term is used quite loosely here) was basically non-existent due to the latitude they had from their banks.  Moreover, during the time (as we all know from the economic crash in 2008) the resulting sub-prime loans were par for the course.  In hindsight, sure they look like poor business judgment (or a complete lack thereof), but when they were being issued beforehand it certainly didn't appear that way - home loans were driving profits and empirically carried small amounts of risk (which banks then thought could also be offset further).  Where were the critical thinkers and experts then to stop such behavior by employing business judgment?  Where will they be in an alternative world of acquisition policy if left quite unrestrained and to their own devices and conceptualization of "business judgment?"  Finally, if we're going to hold acquisition officials accountable for utilizing "business judgment" as the standard, how do we do so fairly?

Matthew,

Not Vern but I want to respond anyway. In my view the Kelman reforms of the mid-1990's were half-right. We needed to give people more discretion. The problem was that we didn't increase their accountability. We increased discretion without commensurate accountability for that discretion.

My two cents.

H2H,

No problem - Vern doesn't have a monopoly on the discussion of my remarks so I welcome the input.

here_2_help said:

Not Vern but I want to respond anyway. In my view the Kelman reforms of the mid-1990's were half-right. We needed to give people more discretion. The problem was that we didn't increase their accountability. We increased discretion without commensurate accountability for that discretion.

I'm confused though...are you saying we're currently in an environment with discretion, but without accountability?  Or was increased discretion granted back in the mid-1990s without commensurate accountability and, as a result, that discretion was subsequently curtailed?  Because I think the concerns raised by most individuals on this thread, in particular Vern, is that there is a lack of discretion, or as he would state, the ability to make business decisions (and I would agree).

Matthew -- To clarify:

The Clinton reforms, championed by Kelman, were intended to increase individual discretion. That they did, but there was no commensurate increase in individual accountability. Most of the Obama "reforms" have consisted of rolling-back that discretion, substituting instead centralized command and control. (Hello Review Boards!) Accountability is still generally lacking.

Again, my personal views.

Matthew Fleharty said:

I'd support that type of acquisition environment as those techniques need not be uniform throughout the DoD (or any agency) to provide for fairness as long as that process allows for competition to the maximum extent practicable and equal treatment of similarly situated or like offerors.

Emphasis added.

Matthew:

That quote from your last post begs the question, and leaves me uncertain about where you stand on resolution of the issue between us. The issue has been whether fairness or business judgement is a better foundation for policy. The fact that my approach would be okay with you as long as it provides for fairness, which is what I think you said, does not resolve the issue. It merely presumes resolution of that which is yet to be resolved. In any case, I have no idea what you mean by "competition to the maximum extent practicable." Without further explanation from you, that's just regulatory gobbledegook, written long, long ago, before I entered the contracting field.

As for your observations about what I've said about workforce competence and its bearing on the wisdom of adopting business judgement as a foundation for policy, those comments pertain whether the foundation is fairness or business judgement, since fairness, too, requires the exercise of judgement. If we want optimal results from the system, then we must either improve the workforce or accept suboptimal performance, no matter what the foundation for policy.

It's been an interesting discussion. Thank you.