Too Good To Be True!!!

Many of us think that we know everything; however, I have been proven wrong. You are thinking about convicting someone before they commit the crime?

I know of at least one contractor, and a major one at that, who regularly lowballed their quotes, knowing that he could rely on the government to make changes that he would then price in the stratosphere to make up their profits.

That might not work for simple orders or some services, but it worked like a champ for that contractor. They even won a protest when they lost a competition due to that practice, even with all of the evidence clearly showing that was his practice over decades of doing business with the government.

For simple orders, I would document my findings, then contact the vendor and question them on their quote, reminding them of the ramifications for being unable to fulfill their end of the bargain. That has worked for me a number of times, and the contractor either revised their quotes or bowed out of the competition.

Services are harder to catch such practices, but I have not had as many problems in that area as I usually use GSA MOBIS schedule contractors or I get access to previous contracts that potential contractors have won and check out their labor rates, OH and other costs for similar work.

And in such cases, a "crime" has been committed once a low-ball bid, quote or proposal has been submitted. It is further cemented into the "illegal", or at least unethical, category once it has been accepted and incorporated into an contract. The question then is whether or not the crime will be discovered, or prosecuted should it be found.

I assume that you work for the government. If you work for the private sector and are asking about a private sector bidding process, the answer is that you can do what you please.

In a government procurement, if the contract will be firm-fixed-price and you believe that the bidder/offeror has submitted a below-cost bid or proposed price, you cannot reject the bid/proposal for the reason. What you must do is determine whether the bidder/offeror is financially responsible in accordance with FAR 9.104-1(a), i.e., that the bidder/offeror has the financial resources to take the loss and still be able to perform successfully. If you decide that the bidder/offeror does not have adequate financial resources, then the proper course of action is to declare the bidder/offeror to be nonresponsible and reject its bid/proposal. If the bidder/offeror is a small business, you must then refer it to the Small Business Administration for certificate of competency consideration, in accordance with FAR 19.602-1.

If the contract is to be cost-reimbursement and you think that the proposed estimated cost is unrealistically low, then you must take that into consideration when making the source selection decision. You do that by determining the most realistic estimated cost ("most probable cost") for the proposal and using that number instead of the proposed estimated cost when comparing offerors to one another.

From a risk management standpoint, every supplier should be evaluated for its potential to deliver nonconforming goods/services. The impacts to the program/contract should be assessed, and appropriate mitigation plans should be put into place.

In some situations, it may make sense to make two or more awards, in case the apparent winning bidder doesn't perform as promised. Especially if the risk assessment shows a relatively high probability of failure coupled with a relatively significant programmatic impact.

Not sure if the Government folks can do this at their level, but I'm darned sure that the primes can do it -- and should. But they don't, or at least they don't do it often enough.

I remember one program review I attended. For want of a properly drilled hole in a piece of titanium (work valued below the SAT), a launch date was missed, along with schedule-related milestone bonus payments and lots and lots of award fee. Nobody ever asked whether the low bidder was capable of actually drilling a proper hole in the titanium in this instance because, after all, that was the business the supplier was in and they had done it lots of times before. (NB: The supplier's senior prototype machinist retired a couple of months before the work was awarded....)

In another instance, a tiny part fabrication P.O. put a $150,000,000 program in jeopardy and cost millions in lost award fees. Somebody could have awarded ten duplicate fab P.O.'s, received 10 parts, thrown 9 of them away, and that would have made really good business sense. I could go on.

Hope this helps.

dwgerard,

You wrote:

I know of at least one contractor, and a major one at that, who regularly lowballed their quotes, knowing that he could rely on the government to make changes that he would then price in the stratosphere to make up their profits.

That might not work for simple orders or some services, but it worked like a champ for that contractor. They even won a protest when they lost a competition due to that practice, even with all of the evidence clearly showing that was his practice over decades of doing business with the government.

I read this as decades of Government incompetence, not as an example of bad behavior on the part of the contractor. Why didn't the Government determine the contractor nonresponsible if it was lowballing its quotes? Why didn't the Government evaluate price realism to protect itself from this practice?

If an offeror chooses to buy-in, what do you think the offeror has done wrong?

Don, there's not a whole lot you can do if the acquisition method is an IFB... Non-responsibility is not as easy as one may think or desire.

I am wondering whether anyone has come across a situation wherein you know that an apparent successful offeror who has won a bid from you cannot possibly deliver conforming goods because the price is "too good to be true"! My question is, "what steps can be taken to have someone disqualified from receiving a award under these circumstances?

First, I am a contractor and do not work for the government. Second, I would not characterize the apparent successful offeror's bid as a "Low Ball" bid but rather a "No Ball" bid. What I mean by this is the successful offeror apparently pulled a bid out of the air, has no idea what he bid on, has contacted me, the manufacturer of the commodity in question with a line drawing and asked for a price on the drawing "or equivalent". Never mind that the item in question is a critical supply item and the government drawing calls for the part to be manufactured according to the drawing without exception! Furthermore the tooling costs alone cost far more then the bid price! So the government is either going to get a non-conforming product or the successful offeror is gong to realize that there is no way to supply the part for the bid price and get out of the contract...only to have the government have to put the part for bid again and have someone else who is "clueless" as to what they are bidding on win the contract!

Don,

The contracting officer did declare the price as unrealistic, backed up with DCAA reviews of both the current price and previous instances of low balling from the contractor and the resultant modifications. The contractor protested being removed from the competition, and the unrealistic price determination, and the GAO agreed with the contractor that even if they were low, it was not "unrealistic" if they had successfully completed contracts under similar situations in the past. The fact that the Government spend months fighting over many, many bloated modification proposals in those situations was "not a factor" in that decision.

I am not revealing the GAO case number, the contractor nor the Government organization to protect the integrity of this website, but I would be glad to send you the information via email.

Don,

The contracting officer did declare the price as unrealistic, backed up with DCAA reviews of both the current price and previous instances of low balling from the contractor and the resultant modifications. The contractor protested being removed from the competition, and the unrealistic price determination, and the GAO agreed with the contractor that even if they were low, it was not "unrealistic" if they had successfully completed contracts under similar situations in the past. The fact that the Government spend months fighting over many, many bloated modification proposals in those situations was "not a factor" in that decision.

I am not revealing the GAO case number, the contractor nor the Government organization to protect the integrity of this website, but I would be glad to send you the information via email.

dwgerard,

That isn't what Don asked. He said why didn't the government detremine the contractor as non-responsible? A contractor can come in with a low price that appears unrealistic. However that doesn't mean the contractor can't or won't perform at that price. Non-responsible looks at whether the contractor has adequate financial resources to perform.

Without knowing the specifics of the case, what you conveyed above is right in line with GAO thinking and decisions. If a contractor sucessfully performed previously under similar situations and whats to bid a low amount, that's their choice.

Formerfed,

Perhaps, but this is what I proposed at that time to resolve the problem:

I would like to add to the contractors offer the costs to the Goverment for the unnecessary modifications and unreasonable length of time that the modifications entailed. If we could so easily get that information, particularly when those amounts were 5 or 6 times that of any other contractor in that industry, I believe we should be allowed to make those adjustments as they are documented and quantifiable.

My proposal was not accepted, and they ended up with the protest and results I wrote about above.

As far as non-responsible goes, that is kind of hard to prove when the contractor has gotten wealthy by abusing the contracting systems over many years. Makes me wish I could paste in the picture of that nice little boat named "Change Order" in this space!

dwgerard,

One of the factors to consider when evaluating contractor performance is the contractor?s history of reasonable and cooperative behavior. If a contractor had a record of submitting an excessive amount of meritless REAs and/or exorbitant pricing, then this should be considered when evaluating their past performance.

Also, I sense that you have a problem with a contractor who "buys-in." I don't, and let me explain why.

The Government's rules require that price be a "significant" factor in source selection. When using sealed bidding, it is the only evaluation factor (plus price-related factors). When awarding a fixed-price contract, the Government generally doesn't care what the contractor's cost of performance will be, unless the offered price is alarmingly low.

The Government has another rule that provides for pricing equitable adjustments based on reasonable costs of performance. If a change order causes the contractor to incur a cost increase, the price will adjusted to account for a reasonable estimate of the cost increase, plus profit.

If I'm a savvy contractor who knows these rules and wants to make money on a fixed-price contract where price was going to be a dominant factor in choosing who gets the award (and I anticipated a lot of change orders), wouldn't it make sense to offer a price as low as I could possibly stand (even below cost) in hopes that I could win the award and make up for any losses through equitable adjustments?

Actually, I don't think you even have to be a savvy contractor. If I explained these rules to 10 strangers to Government contracting and asked them to come up with a strategy to make money, 9 out of 10 would probably choose to propose a low price in hopes that they would make up for any losses through change orders. Does this make them bad people?

I'm familiar with the picture that you referenced. However, I don't see it as a statement against dishonest contractors, I see it as a satire of the Government's procurement rules.

I agree with Don and would use past performance as part of the evaluation process. Since this contract has a histrory of requiring several contract modifications assuming because of changes in the spec/sow, I would use competitive negotiation prodecures and conduct discussions to eliminate as much of the uncertainties upfront. This is the reason why sealed bidding is not appropriate.

Formerfed,

The contract I have been writing about was a Best Value negotiated RFP with discussions with several RFP revisions as discussions were held. There was verbiage in the RFP that stated past performance would be considered but I do not recall if the distinctions between Past Performance in terms of bad performance and a separate category of how well the contractor had gotten along with the government in the past was considered.

The actual root problem in my opinion is the inexperience of many 1102's and program personnel have in actual negotiations and evaluating proposals. In that office, they hired contractors to evaluate the technical proposals, so the program people were somewhat removed from the information they were supposed to evaluate.

Another root cause I believe exists is that many RFP's are way, way too complicated and arcane, which hurts the government more than it does the contractors. In reality, how can anyone evaluate loosely defined objectives that would require a month of parsing words and can be defined in a dozen different ways?

I do not have a solution to these problems other than training, training and more training. Training to keep it simple, training in negotiation techniques and source selection procedures, and training for everyone, including the program side. And perhaps if we were not able to outsource the technical evaluation, then maybe the technical source selection material would be revised to a level where it actually made sense for a change.

Also, I sense that you have a problem with a contractor who "buys-in." I don't, and let me explain why.

*****

If I'm a savvy contractor who knows these rules and wants to make money on a fixed-price contract where price was going to be a dominant factor in choosing who gets the award (and I anticipated a lot of change orders), wouldn't it make sense to offer a price as low as I could possibly stand (even below cost) in hopes that I could win the award and make up for any losses through equitable adjustments?

Don,

I have a problem with your "savvy" contractor's strategy, and let me explain why.

It's a little thing we call the Federal Acquisition Regulation or FAR. It's got this little piece at 3.501 that discusses "buying-in" and requires a contracting officer to "take appropriate action to ensure that buying-in losses are not recovered by the contractor through the pricing of (1) change orders; or (2) follow-on contracts subject to cost analysis."

I have no problem with the initial buy-in. It's the getting well through fraudulently priced change orders or inflated bids for follow-on contracts that cause my problem. I would hope that your "savvy" contractor can afford a good legal defense team.

Hope this helps.

.

If I got this right,

Pro Se Harry bid on a job and lost.

Then, the contractor who underbid him and won the contract came to him to ask for a quote to fabricate the item.

Harry is asking how he can influence the Government so that they award contracts to him in the future, and not to his too-low-priced competition.

Harry knows his costs to produce the item. He knows the winning bid. He thinks he knows his competitor's costs.

.........

Harry assumes that the guy who beat him didn't know that Harry had submitted a losing bid.

That's a reasonable assumption, but not the one that I made.

I assume that the low-ball competitor was collecting pricing data in order to support a request for a waiver to Buy America Act provisions. I assume the low-baller wants to fabricate the item in Somalia, where labor costs are lower, and environmental requirements are less stringent.

Bottom line, I don't know the low-baller's costs, and neither does Harry. Maybe this competitor has access to an innovative new technology that is a lot cheaper. Maybe he already built the items for a different project that got canceled. Maybe he feels bad about cheating on his taxes and sees this as a way to compensate the Government.

To help Harry with his situation, if an unfit competitor is underbidding an item he can't even furnish, and if the item in question is a critical supply item, Harry might work with the buyer to institute some sort of pre-qualification procedure, perhaps a qualified supplier list or by specifying a proprietary process.

.

The Government has another rule that provides for pricing equitable adjustments based on reasonable costs of performance. If a change order causes the contractor to incur a cost increase, the price will adjusted to account for a reasonable estimate of the cost increase, plus profit.

If I'm a savvy contractor who knows these rules and wants to make money on a fixed-price contract where price was going to be a dominant factor in choosing who gets the award (and I anticipated a lot of change orders), wouldn't it make sense to offer a price as low as I could possibly stand (even below cost) in hopes that I could win the award and make up for any losses through equitable adjustments?

Actually, I don't think you even have to be a savvy contractor. If I explained these rules to 10 strangers to Government contracting and asked them to come up with a strategy to make money, 9 out of 10 would probably choose to propose a low price in hopes that they would make up for any losses through change orders. Does this make them bad people?

The problem with that logic is that a contractor should not be able to make up its losses from a below cost bid (i.e., "get well") if the CO knows his business.

Suppose that an offeror's best estimate of what it will cost him to do a job is $1,000,000, but the offeror plans to get well on change orders and equitable adjustments and so prices the job at $800,000, a below-cost bid that leaves $200,000 on the table. The offeror wins the contract at the price of $800,000 and looks forward to recovering the $200,000 through change order pricing.

Now suppose that the government issues a change order. The equitable adjustment must be based on the difference between the best estimates of what it would have cost the contractor to perform before the change and what it will cost to perform after the change. If it would have cost the the contractor $1,000,000 to perform before the change and it will cost the contractor $1,100,000 to perform after the change, the equitable adjustment should be $100,000 plus profit. The contractor cannot properly recover the $200,000 that it left on the table through that equitable adjustment. The only way that the contractor could recover the $200,000 would be if the CO were incompetent or if it were to falsely inflate its estimate of what it would have cost to perform before the change by $200,000.

Taking advantage of the CO's incompetence or falsely inflating an estimate in order to get well would make that contractor bad people, in my opinion, and might earn jail time.

Don,

I have a problem with your "savvy" contractor's strategy, and let me explain why.

It's a little thing we call the Federal Acquisition Regulation or FAR. It's got this little piece at 3.501 that discusses "buying-in" and requires a contracting officer to "take appropriate action to ensure that buying-in losses are not recovered by the contractor through the pricing of (1) change orders; or (2) follow-on contracts subject to cost analysis."

I have no problem with the initial buy-in. It's the getting well through fraudulently priced change orders or inflated bids for follow-on contracts that cause my problem. I would hope that your "savvy" contractor can afford a good legal defense team.

Hope this helps.

I see that you can copy and paste from the FAR, but you should probably take some time to understand it before doing so. FAR 3.501 doesn't prohibit the practice of buying-in. Read it. Further, buying-in does not mean that the contractor intends to submit fraudulently priced change orders, either.

The fact that "buying-in" is discussed as an improper business practice in the FAR is questionable. In an article entitled Buying-In: An Improper Business Practice (18 No. 4 Nash & Cibinic Rep. ? 14) the author states:

We've always been fascinated that the Federal Acquisition Regulation categorizes buying-in as an ?improper business practice.? See FAR Subpart 3.5 entitled ?Other Improper Business Practices? and discussing buying-in as the first such practice. FAR 3.501-1 defines ?buying-in? as

submitting on offer below anticipated costs, expecting to-

(1) Increase the contract amount after award (e.g. through unnecessary or excessively priced change orders); or

(2) Receive follow-on contracts at artificially high prices to recover losses incurred on the buy-in contract.

To paraphrase this definition, we would say that the FAR is stating that it is an improper practice to offer the Government a real low price in the hope that the Contracting Officer is incompetent and therefore unable to protect the agency from subsequent overpricing. Well, while hope springs eternal, we doubt if it is an improper business practice.

The author goes on to describe a qui tam FCA suit, U.S. ex rel. Bettis v. Odebrecht Contractors of California, Inc., 297 F. Supp. 2d 272 (D.D.C. 2004), where the relator unsuccessfully alleged fraud in the inducement (among other allegations) against a contractor for submitting a low bid even though it did not intend to perform at the bid price. The author concludes with:

We hope this decision puts to rest the idea that buying-in is fraudulent or forms the basis of a false claim. As the court so well reasoned, the only possibility of fraud in these circumstances is if the contractor submits a false claim during performance of the contract in an attempt to ?get well.?

I think my savvy contractor can ward off any legal challenges with a mediocre legal defense team.

The problem with that logic is that a contractor should not be able to make up is losses from a below cost bid (i.e., "get well") if the CO knows his business.

Suppose that an offeror's best estimate of what it will cost him to do a job is $1,000,000, but the offeror plans to get well on change orders and equitable adjustments and so prices the job at $800,000, a below-cost bid that leaves $200,000 on the table. The offeror wins the contract at the price of $800,000 and looks forward to recovering the $200,000 through change order pricing.

Now suppose that the government issues a change order. The equitable adjustment must be based on the difference between the best estimates of what it would have cost the contractor to perform before the change and what it will cost to perform after the change. If it would have cost the the contractor $1,000,000 to perform before the change and it will cost the contractor $1,100,000 to perform after the change, the equitable adjustment should be $100,000 plus profit. The contractor cannot properly recover the $200,000 that it left on the table through that equitable adjustment. The only way that the contractor could recover the $200,000 would be if the CO were incompetent or if it were to falsely inflate its estimate of what it would have cost to perform before the change by $200,000.

Right. But how does that disprove what I wrote? Each time the contractor gets an equitable adjustment, the $200,000 left on the table is reduced by the amount of profit in the equitable adjustment.

Taking advantage of the CO's incompetence or falsely inflating an estimate in order to get well would make that contractor bad people, in my opinion, and might earn jail time.

Who said anything about falsely inflating estimates? Jail for taking advantage of the CO's incompetence? C'mon. Read Buying-In: An Improper Business Practice (18 No. 4 Nash & Cibinic Rep. ? 14).

I see that you can copy and paste from the FAR, but you should probably take some time to understand it before doing so. FAR 3.501 doesn't prohibit the practice of buying-in. Read it. Further, buying-in does not mean that the contractor intends to submit fraudulently priced change orders, either.

I think my savvy contractor can ward off any legal challenges with a mediocre legal defense team.

Don, seriously, please re-read my post responding to your post. Your post said "If I'm a savvy contractor who knows these rules and wants to make money on a fixed-price contract where price was going to be a dominant factor in choosing who gets the award (and I anticipated a lot of change orders), wouldn't it make sense to offer a price as low as I could possibly stand (even below cost) in hopes that I could win the award and make up for any losses through equitable adjustments?"

Your plain language indicates that you expect your "savvy contractor" to buy-in with the intention of getting well ["make up for any losses"] through equitable adjustments. That is exactly the practice the FAR terms an improper business practice.

And if you will take a moment and re-read my post, you will see my position is clearly stated: "I have no problem with the initial buy-in. It's the getting well through fraudulently priced change orders or inflated bids for follow-on contracts that cause my problem."

When a contractor submits change orders priced to not only cover the costs of performing the changed work, but also to cover losses it would otherwise incur from its initial decision to buy-in, that's what creates the fraud part, or so a prosecutor might well allege.

My feeling was, and still is, that your original post quoted above was misleading. At a minimum, you failed to address the issue through citation to the appropriate FAR language. I remedied that omission through my honed "cut-n-paste" skillz. Now you might have posted hastily with some ill-chosen phrasing, and consequently perhaps we are on the same page after all. But I felt the need to point out to others, perhaps newbies at the whole "government contracting" thing, that buying-in with the intention of getting well through change orders is officially frowned-upon, and contracting officers need to be vigilant about detecting and reporting such improper practices.

Hope this helps to clarify.

Each time the contractor gets an equitable adjustment, the $200,000 left on the table is reduced by the amount of profit in the equitable adjustment.

True, but if you look at it that way, then the profit on the equitable adjustment is reduced when shifted to cover the loss of the buy-in.

Who said anything about falsely inflating estimates?

I did.

Jail for taking advantage of the CO's incompetence? C'mon.

Sure. Why not, if it involves fraud? I don't know why you cite the Nash & Cibinic article. All that article says is that buying-in, in and of itself, is not fraudulent. I did not say it was and I do not think it is. What I said was that committing fraud in order to get well after buying-in might lead to jail time. I stand by that.

You apparently do not have a problem with a company that buys-in or with the practice of buying-in. That's too bad, given that you teach at the Defense Acquisition University and know that overruns and other program difficulties resulting from buy-ins have led to congressional and public criticism of DOD. It is a very big problem in weapons acquisition. That's one of the reasons it is considered an improper business practice. One writer has suggested that it is analogous to predatory pricing. See Derry, Buying-In: Why Externalities Support False Claim Act Liabilities, 35 Pub. Cont. L.J. 709 (2006). A 1984 Briefing Paper, Buying-In, by Virden and Gallatin, included this advice to prospective contractors:

If you submit a below-cost bid, do not expect to recoup your losses on change orders or follow-on contracts by including the loss (or any portion of it) as an element of cost. This practice constitutes buying-in, which is proscribed by the regulations and could lead to allegations of fraud, misrepresentation, or possible debarment.

Buying-in is improper by official policy. The reason that FAR does not proscribe it is because it is a matter of intent, which is difficult for COs to verify and to prove, and so they should not reject bids or proposals based on the basis of a suspicion. But FAR warns contracting officers to be on the lookout for it and to prevent contractors from getting well. FAR also warns that buying-in can decrease competition and result in poor performance.

Yet you, a Defense Acquisition University professor, of all people, have no problem with it. Is that what you're teaching DOD contracting personnel, that they should have no problem with buying-in, which is officially declared to be an improper business practice, regardless of what Nash and Cibinic have thought.

I don't think you've thought this through, my friend, and I think you should.

here_2_help,

Understood. My point was that the savvy contractor in my example hasn't broken any rules. He's taking a calculated risk to reduce or forego an allowance for profit in his proposed price in order to win the contract. He does this because he expects there to be a lot of change orders and he knows that he is entitled to a reasonable profit on equitable adjustments. In an environment with intense competition where price is the dominant factor (or only factor) in deciding who gets the award, and the type of work lends itself to numerous contract changes (e.g., construction, ship repair), this is often a successful strategy. Such a strategy is a logical consequence of procurement practices that 1) place a dominant emphasis on price when selecting contractors and 2) provide for a reasonable profit when making equitable price adjustments to contracts as a result of changes.

You and Vern seem to have equated such a strategy with submitting false claims. While contract administrators should be extra vigilant for false claims when administering a contract with a contractor who has proposed a low price, this does not necessarily mean the contractor is dishonest for employing the strategy that he did.

Vern,

I don't think that you understood what I was saying. Read the paragraph above.

I absolutely have not equated buying-in with submitting false claims. Not even close. I have said that seeking to get well could lead to fraudulent behavior. And I have not misread you.

I sense that you have a problem with a contractor who "buys-in." I don't... .

Well, you should. Buying-in is defined as submitting a below-cost proposal expecting to get well through "unnecessary" or "excessively priced" changes or by charging "artificially high prices" for follow-on work. See FAR 3.501-1. That's the official definition, Don. Read the FAR. And you don't have a problem with that? Buying-in is, by long-standing official policy--policy that predates the FAR by many years--an improper business practice, no matter what Nash and Cibinic have thought. Firms that buy-in are behaving dishonestly, unless they are up front about planning to seek unnecessary changes or excessive or artificially high prices. Seeking to get well through unnecessary changes or excessive or artificially high prices could very well lead to fraudulent behavior, if the contractor follows through on its expectation.

Buying-in is an unethical practice that has led to serious problems and has long been condemned. A contractor who does it is dishonest. But you have no problem with it! Are you teaching DOD contracting personnel to have no problem with it? I sure as hell have a problem with it.

Perhaps you have not expressed yourself as clearly as you would have liked.

Vern,

You selectively quoted me and omitted my explanations. Thanks. My last post explained my position:

My point was that the savvy contractor in my example hasn't broken any rules. He's taking a calculated risk to reduce or forego an allowance for profit in his proposed price in order to win the contract. He does this because he expects there to be a lot of change orders and he knows that he is entitled to a reasonable profit on equitable adjustments. In an environment with intense competition where price is the dominant factor (or only factor) in deciding who gets the award, and the type of work lends itself to numerous contract changes (e.g., construction, ship repair), this is often a successful strategy. Such a strategy is a logical consequence of procurement practices that 1) place a dominant emphasis on price when selecting contractors and 2) provide for a reasonable profit when making equitable price adjustments to contracts as a result of changes.

By the way, you misread the FAR. You wrote:

Buying-in is defined as submitting a below-cost proposal expecting to get well through "unnecessary" or "excessively priced" changes or by charging "artificially high prices" for follow-on work. See FAR 3.501-1.

That's not what it says. The definition of "buying-in" is as follows:

?Buying-in,? as used in this section, means submitting an offer below anticipated costs, expecting to?

(1) Increase the contract amount after award (e.g., through unnecessary or excessively priced change orders); or

(2) Receive follow-on contracts at artificially high prices to recover losses incurred on the buy-in contract.

"...through unnecessary or excessively priced changed orders" is only given as an example of a method of increasing the contract amount after award. This definition does not say that it is the only method for increasing the contract amount after award, which is what your statement implies.

Yes, I selectively quoted you. I quoted the parts that you ought to retract. You said that you don't have a problem with buying-in. You said it clearly and unequivocally. That was mistake on your part, and I think you're trying to weasel your way out of it by saying you've been quoted out of context. The heck you have.

I didn't "misread" the FAR. I quoted the parts of the definition that I wanted to quote and I quoted them accurately--the parts that show that buying-in (aka "low-balling") is below cost bidding with the intention of taking advantage of the buyer at a later date in order to get well. (It's different from "investing," which is pricing research and development at below cost in order to get the production contract at fair and reasonable prices.) Buying-in is planning to cheat. Contractors who buy-in are cheats. You call them "savvy." Are there other ways to cheat than the ones I mentioned? Sure. For example, bidding low to win a large program knowing that when you overrun the government will continue to fund it.

You are a DOD official, yet you ignore the fact that buying-in, in which DOD program managers have often been complicit, has been a plague on weapon system acquisition for decades. The practice is deeply embedded in the DOD weapon procurement culture, and people like you ought to be discouraging it, instead of applauding it.

By way of explanation to the uninitiated: Buying-in is considered improper because the offeror submits a below-cost offer intending to avoid a loss by cheating the buyer after contract award or taking advantage of the buyer's subsequent dependency. This is not to be confused with bidding below cost in order to cover fixed costs, or to gain entry into a market, or in expectation of winning a bigger contract later at fair and reasonable prices. Those kinds of practices are not buying-in and are not improper. They may, indeed, be "savvy."

The improper aspect of buying-in is the intent to take unfair advantage of the buyer after contract award. In this sense, it is akin to predatory pricing, in which a strong company bids low in order to wipe out the competition, planning to then take advantage of its dominant market position to gouge buyers. Don's idea of submitting a below-cost bid with the expectation of being able to mitigate the losses by earning legitimate profits on necessary changes is not buying-in and is not improper. If that's all he means by "buying-in," then his mistake has been calling such a practice "buying-in."

Here is former DOD analyst Frank (Chuck) Spinney describing a form of buying-in used in large weapon programs:

While it takes many forms, the most well known form is the so-called "Milestone II Buy-In," a deliberately "low-balled" estimate of future costs made to obtain a Milestone II approval in a weapons acquisition program. A Milestone II approval is crucially important, because it allows an acquisition program to move into concurrent engineering and manufacturing development (EMD). Once EMD is approved, the defense contractor can begin to "invest" contract dollars (i.e., tax dollars) in building a geographically distributed production base as well as a nationwide network of suppliers. The EMD decision, in effect, gives the contractor permission to use public money to build his political protection network by systematically spreading subcontracts and production facilities to as many congressional districts as possible. This spreading operation is the second step in the gaming strategy and is known as political engineering.

The goal is to raise the political stakes before the true costs of the front-loaded program become apparent. By the time these costs emerge, as they clearly did in the case of the F-18, the series of sequential adjustments in the succession FYDPs have bought enough time and desensitized decision makers to the effects of additional production cutbacks, while the political cost of a fundamental redirection (i.e., termination) has become prohibitive. So, decision-makers on both sides of the Potomac take the easy way out: they cut back production rates to reduce total costs in order to protect the jobs and profits of their constituents. Viewed in the context of the defense power games, production stretch-outs, like those in Side 3, were a predictable, indeed inevitable, consequence of a decision to front load the F-18 into the budget in the late 1970s and early 1980s.

While these power games may work to get programs started in the short term, they create a brain lock that produces a vicious cycle of decay over the long term.

See the entire testimony at http://www.ranum.com/editorials/must-read/...y_testimony.htm.

Here is another description of buying-in from Frank Spinney, in his article, "Defense Power Games," which may found at: http://www.d-n-i.net/fcs/def_power_games_98.htm

The buy-in is an unrealistically low cost estimate made to get a program approved; it is an obvious front-loading gambit. Costs also increase when designs are changed. As equipment becomes more complex, technical difficulties multiply, unpredictable problems crop up more frequently, and designs consequently become less stable. Contractors have economic incentives to change designs because the changes, when accepted by the government, can be used to loosen contract provisions such as cost ceilings. In the defense business, using design changes to hide cost overruns is known as "contract nourishment."

And here is a description by Senator Ted Stevens in the Oct. 15. 1987 edition of the Senate's Congressional Record, 133 Cong.Rec. S14416-02:

Boeing turned from its defeats to an aggressive comeback. Designating certain contracts "must win," it submitted very low bids and initiated its ambitious 25% cost-cutting program. Eyebrows are being raised throughout the industry about the bids, which some have labeled "buying in" or "low-balling." In defense industry jargon, these refer to submitting unreasonably low bids to win a contract, and covering costs through inflated billing later, something Boeing strongly denies.

And here is a comment by Congressman Les AuCoin in the Oct. 30, 1985 edition of the House's Congressional Record, 131 Cong.Rec. H9373-02:

Our committee, in looking at some of these practices has studied reports from its own survey and investigations staff which have shown that the absence of competition and the buying in that's gone on in navy overhaul and maintenance work on both coasts has hurt the taxpayer; has run up costs, and is not a bargain by any stretch of the imagination.

The subcommittee has looked with great interest at reports of the General Accounting Office. Reports which have examined these practices that I refer to. The General Accounting Office has indicated that in the absense of competition, which the gentleman would remove by his amendment, we have seen in the case of cost plus and fixed cost contracts between 80 percent and 95 percent of the cases were involved in low balling.

There is a vast literature, going back to the 1950s, testifying to the evils of buying-in and the harmful effect that it has had on government contracting. All contracting professionals should have a problem with it.

Vern,

It shouldn't surprise you that I'm trying to weasel out of what I wrote, given my utter lack of integrity.

You wrote:

Don's idea of submitting a below-cost bid with the expectation of being able to mitigate the losses by earning legitimate profits on necessary changes is not buying-in and is not improper. If that's all he means by "buying-in," then his mistake has been calling such a practice "buying-in."

I guess that means that you agree that the savvy contractor was not doing anything improper in my scenario. However, you seem to be reading definition (1) of "buying-in" as saying that "unnecessary or excessively priced change orders" are the exclusive machinations to "increase the contract price after award." Why?

[Y]ou seem to be reading definition (1) of "buying-in" as saying that "unnecessary or excessively priced change orders" are the exclusive machinations to "increase the contract price after award." Why?

Gee, I just spent my last two posts quoting extensively from other descriptions of buying-in. Did you miss those posts?

Buying-in is officially an improper practice. It is not merely submission of a below-cost offer. It is submission of such an offer with the intent of subsequently getting well by taking advantage of the buyer. You took a pretty aggressive stance that buying-in is savvy and said that you have no problem with it. I don't think you understood buying-in. Looking back at your posts, you seem to have believed that all forms of below-cost bidding are buying-in, but they're not, as the FAR definition of buying-in should make clear to someone with your knowledge and experience. Your posts prompted responses from me and others, drawing sarcastic ripostes from you: "I see that you can copy and paste from the FAR, but you should probably take some time to understand it before doing so." I think it's you who should take time to understand.

And I didn't say that you have no integrity. If I thought that we wouldn't be working together, so knock that off. What I believe is that you wrote without thinking things through. No DOD official should be on record as saying that an officially-declared improper business practice is savvy and that he or she has no problem with it.

I'm not going to continue going back and forth with you. My position in this matter is and has been absolutely clear and you know where I stand and why. If you want to continue declaring buying-in to be savvy and that you have no problem with it, that's your business.