Small Businesses as Primes: Beware the Scorpion

As the 2012 Fiscal Year comes to a close, procurement shops are in full gear awarding contracts in the shadow of sequestration. Many large firms are also trying to close business after months of business development, only to see last minute decisions to make their solicitation a small business set-aside. This creates another potential avenue of abuse, where small businesses are used to “prime” a contract for a large business.

We have seen constant abuse of small businesses as subcontractors, most notably large firms using small businesses to check boxes, win awards, then not provide what was promised. Although small business subcontracting plans are required per FAR Subpart 19.7, they are rarely enforced.

However, the abuse of small businesses as “primes” is really the perfect storm of potential abuse, and calls to small businesses are going on all over the greater Washington area this time of year, as large businesses cannot afford to realize loss of revenues after months of business development, and looking for a pawn to realize profit.

Small businesses struggle to get a toehold in the government contracting arena. It is a very tempting offer to prime a contract for a large business, as it creates new relationships, new sources of revenues, and opportunities for growth. Further, the past performance experience is vital for new work.

However, careful consideration and “bid/no-bid decisions,” similar to submitting a Request for Proposal, need to be made if the small business wants to prevent being used by both government officials, and large businesses.

First, what is the firm’s relationship with the agency, and the contracting official? Understand that the large business has a very close relationship with procurement personnel, and perhaps a relationship that is beyond what many consider ethical or arms-length. The large business is trying to steer a contract to you, but at what price?

Second, and under no circumstances, can the small business allow the large business to occupy the program manager (PM) position. The large business will make the case that they have the relationship, they understand the customer’s needs and requirements, and they are better positioned to support the client. Further, they may play hardball, and insist that they get the PM position, or no deal.

Be prepared to walk away. The benefits do not outweigh the costs, as it is the small businesses’ past performance and reputation on the line, not the large business. The arguments made by the large business are false. If you could not support the customer yourself, how can you even be considered for the award?

Small businesses are trusting large businesses to treat them fairly, equitably, and to ensure mutual success. Seems like a no-brainer? Think again.

In this treacherous environment of government contracting, the competition is ferocious, and every penny is being accounted for, as large businesses need to weather the storm and keep margins and market share stable.

From the perspective of the large business, why not use a small business to get 49% of a contract, and then undermine them to get it all?  Again, it is not their reputation or past performance that will suffer, and they have positioned themselves where they can show they are not at fault. Anyway, there are a hundred small businesses at the door waiting for the same “opportunity.”

Further, the undermining is convincing the procurement official that a small business cannot do the work, or to prevent a socioeconomic set-aside designation, so now the large business is in the position to get it all. They may even go as far to write the Determination and Findings for the procurement official!

Regretfully, this happens much more than either side wants to admit. Accountability and oversight are lax to begin with, but at this time of the year, contractual irregularities happen with an alarming degree of frequency to satisfy last-minute requirements, spend money, and award contracts. Leadership is simply asleep at the switch, and OSDBU offices seem to be shrugging their shoulders at these complaints.

Before you put the scorpion on your back to cross the river, understand that the scorpion has a stinger, and is prepared to use it. Only in this scenario, the small business drowns by itself.

Buying In Now Effectively Policy Across Government

In a recent breakfast  hosted by the Coalition for Government Procurement, Office of Federal Procurement Policy Administrator Joe Jordan effectively punted on the notion of best value versus the realities of federal procurement; lowest priced offers win contracts.

…Generally speaking, he said industry likes best-value procurements. They allow companies to propose higher prices, since officials will consider other evaluation criteria beyond price. On the other hand, the government is pushing low price and not always fully analyzing the entire lifecycle of a project, Jordan said. Both sides have good arguments, so the contracting officer's judgment is the final arbiter….

Due to the intense focus on budget cuts, and sequestration still casting a very ominous shadow on the federal government, price has become the most important factor in any source selection, and will remain so for the foreseeable future.

Any talks of best value are out the window, so agencies should state as such in their solicitations. The issue really is about how do determine technical acceptability, given the foundations of what are normally poorly defined requirements.

Firstly, requirements for proper use of Lowest Price, Technically Acceptable (LPTA) should be very standardized, commodity based purchases that require no other factors other than price. That means just the commodity itself through very rigid, specific, and accurate requirements. No opportunities for customer service, shipping, transport, customization, etc. These requirements require the use of best value, and the ability to offer better service.

You get what you pay for. There lies the rub.

Often times, the government simply does not know what it wants. It thinks it does, so it puts horribly written Requests for Proposal on the street, that result in dozens and dozens of questions, since the requirements are either redundant, confusing, circular logic, not achievable, unrealistic, boilerplate and not applicable, etc. Further exacerbating the problem is the lack of engagement with industry during the pre-acquisition phase, assuring poor requirements. Lack of leadership, poor capabilities, and the excuse of lack of time are the usual suspects.

The pressures to save money are overwhelming, so prices are driven downward to unrealistic levels. Is anyone still doing cost realism assessments? You know the answer.

How often does the Government Accountability Office sustain a protest where the losing offeror, and often an incumbent, claims they lost to a competitor who underbid them by 40%, even though the incumbent knows exactly what the real cost of doing, at a satisfactory level, entails?

This vicious circle ensures performance will fail, and it is the lack of a long-term focus that is troublesome. Poor leadership, combined with continued declines in the skills and capabilities of the acquisition workforce (I include PMs in that bunch) have created a perfect storm of continued poor performance and waste. Just look at the fiasco that is the System for Award Management (SAM) for a perfect example of this.

The General Services Administration can claim SAM was best value, but price is kingmaker. “Buying In” is seen as an improper business practice per Federal Acquisition Regulation 3.501, but it seems to be standardized now.

Investment analysis is a foreign concept, since saving a few bucks today will lead to inevitable rise in costs tomorrow, failed programs, and poor performance.

Awarding to the lowest bidder is a disaster waiting to happen. Only when innovation is desired, through the use of performance-based contracting, combined with properly written requirements and effective contract management and execution, can best value be realized.

That is the best outcome for the taxpayer. Easier said than done.

DHS Rule Protects Small Business? Think Again.

Federal Computer Week reported on a proposed change  to the Homeland Security Acquisition Regulation, the supplement to the Federal Acquisition Regulation by the Department of Homeland Security (DHS), in order to help small businesses fend off rapacious primes contractors from “windfall” payments on Time and Materials contracts.

“Help” like this is not desired by small businesses.

The first part of the proposed change, per the Federal Register notice,  states:

…The first of the two existing FAR policies provides the option to require separate labor hour rates for each subcontractor under a T&M/LH contract, in addition to the labor hour rates established for the prime contractor. See FAR 16.601(e). The current FAR policy authorizes an agency either to permit individual contracting officers to decide if separate labor hour rates are necessary or to establish an agency procedure making separate rates mandatory. This rule proposes to establish a DHS-wide procedure to make the FAR option for consistent use of separate rates mandatory for DHS T&M/LH contracts…

The second part of the ruling is to require consistency with contractors and subcontractors in the way they account for labor hour expenditures, requiring them to check a box for which accounting process will be used to account for overtime labor hours for employees exempt from the Fair Labor Standards Act.

DHS wants “to eliminate unintentional windfall payments to the prime contractor" that can come when work done by subcontractors is billed at the prime contractor's labor rate, according to the notice.

It amazes me when proposed policy changes like this are announced. Does anyone in government understand business anymore? We can expect higher direct labor rates to cover the overhead of managing subcontractors, which would have been previously earned by the markup on the labor.

Those pesky “pass through” fees that subcontractors pay for the privilege of getting crumbs on the contract. Subcontractors can expect fewer profits on a contract, as the “low cost” buying model means even smaller margins.

Profits are not wasteful, and they certainly are not “windfall” payments. Who came up with that language?

More importantly, how does this help small business?

I think one of the commentators on the FCW article gave a very clear picture of the environment that small businesses face:

…The so called "windfall" payments are the only real justification to the Prime to include subcontractors. Do you really think we add subs out of the kindness of our hearts? We do it because you require us to reach out to the small business community. If we lose all incentives to do this, why would we continue to add subs unless they provide a part of the solution that we don't have the ability to provide. The Prime has to get something out of the contract to bring on a sub. There is a cost to administering subcontracts, or had you forgotten that fact? I am sad to see how many skilled acquisition professionals have left the Government for private industry or to retire. The remaining staff just don't understand how Private Industry works. What a shame!...

Small businesses do not need this type of “help.”   

Contractors and Procurement Officials: Customer Service Is A Two Way Street

There seems to be a development that is coming more and more to the forefront: the case of the out-of-control Contracting Officer (KO).

There are usually two paths to interactions with a KO, one being the KO who is overwhelmed with the workload, doing the best they can to handle it, and simply have very little interactions with the contractors. Further, these KOs are very professional, and want to help and guide businesses to be successful, especially small businesses.

This path I would say is the vast majority of the 1102s, and the environment that most contractors work in. That is to say that contract execution, and subsequent performance or contract issues, result in interactions mostly with Contracting Officer’s Representative (COR), and the Program Manager (PM). If you are dealing with the KO, you have some serious problems.

However, there seems to be encroachment in federal acquisition, and government contracting in general, of the second path of KOs, those who act as KO, COR, PM, judge, jury, and executioner. These KOs take advantage of their power over the contractors, and are the first to threaten termination when issues arise in performance, both actual and perceived.

I started a discussion on GovLoop about this topic, but it was something that perhaps no one wants to discuss. Certainly the manifestation of inexperience and subsequent performance issues by 1102s was covered recently in the Washington Post, but talking truth to power and holding those in power accountable can always be difficult, especially with vindictive acquisition personnel.

It should not, and does not, have to be this way. For every conversation I have with a small business colleague on a great relationship with a client, there seems to be another where a company is being crucified for one cent on an invoice, then being threatened with poor past performance and possible termination. What has gone wrong?

I think the pressure cooker that is being an 1102 is creating an environment where those in the trenches are being left to their own devices, without proper leadership, guidance, and direction. Since training on being a business advisor, negotiating, customer service, or understanding how businesses function is effectively non-existent, bad habits develop. Left unchecked, these bad apples rotten the organization, and it seems like more and more rot is advancing. Further, those bad habits get exacerbated by firms that get bullied and intimated, and enable this behavior because they fear being retaliated against through options that get dangled like weapons, or through adverse past performance.

Something has to give.

The mission has to come first, and the “gotcha” attitudes simply help create more problems for performance by both parties. Many contracts call for monthly meetings with stakeholders to discuss issues, and these platforms should be productive ways to help resolve problems, and help create trust and attitudes that enable an environment to work like partners, not adversaries.

It has been alarming at the rate of complaints by small businesses to small business advocates at federal agencies of maltreatment by procurement personnel, and the rise of protests is also a manifestation of these negative and mistrustful attitudes.

Of course, some companies deserve what they get when they under bid work, don’t perform, and simply use the government as an ATM.

However, contracts are expected to provide exceptional service for the taxpayer’s investment. That is a given, and understood. Nonetheless, that goal is a two-way street, and requires both parties to act in the best interest of the taxpayer.

Can’t we all just get along?

Protest Accountability: Mechanisms to Improve Performance

Protests are back in the news, although they never really left. I have been writing about this issue for some time (here and here), but the problem has only exploded in the last five years with the economic implosion, and now sequestration and budgeting Armageddon possible on the horizon.

A recent report from IBM’s Center for the Business of Government also highlight similar issues, but some of the recommendations made in the report are either not realistic or have no chance at implementation.

The current state of the acquisition workforce, and I am including the program office who are (or should) be evaluating a proposal, simply will not allow many of these recommendations to see the light of day.

The report should have focused on the only issues that need leadership support, which is to create confidence in the contract award decision, and to ensure industry understands the requirements, evaluation criteria, and why they did not win a contract.

The critical components that need attention:

Requirements

Poor requirements lead to contract failures, and protests of course. Garbage in equals garbage out, and that cannot be truer when it comes to procurements and subsequent contract award decisions.

Bundled, complex requirements, with hundreds of moving parts, combined with evaluation criteria that do not make sense, is a formula for almost automatic protests.

This is where performance-based contracting comes into play. Focusing on objectives and needed outcomes is where government should be, allowing industry to help solve problems and achieve the ever-illusive outcome: innovation. Instead, the current paradigm is stuck in a quagmire of government’s need to be overly-prescriptive, leading to confusion and poor requirements since industry has the edge in technological knowledge and capabilities. 

Keep requirements simple, use market research to communicate needs and allow industry input, including proper evaluation criteria.

Source Selection Management

Source selections are currently treated as a chore; an unwelcome ancillary duty by government personnel who do not have time for more taskings and who are under pressure from their respective leadership to perform other duties. Further, many senior leaders do not allow their personnel the flexibility needed to focus on a source selection, instead treating it with lesser importance than their subordinate’s day-to-day jobs.

The report makes some good recommendations in this area, but it is leadership that needs change to help them understand the importance of making sound business decisions through effective support of source selections.

I cannot count how many times I have supported a source selection in my consulting career where managers refuse to allow their personnel to focus on a source selection properly. The result is massive frustration and confusion, by both offerors and the evaluation team.

Another significant issue is training, as many program managers are simply not aware of proper evaluation processes, especially when it comes to documentation. Disturbingly, I have also seen many contract specialists also lack these fundamentals.

It is simply a fact that if a contract award decision is transparent and properly documented, this normally leads to confidence in a contract award decision by those in leadership charged to ultimately make the contract award decision, and hopefully industry.

A well-documented source selection, that has followed transparent and proper procedures, combined with effective debriefings, will go a long way to offsetting protest activity.

Transparency

This should include redacted source selection plans and documentation for the losing bidder, which incudes legal and peer review.

The trust issue, as the report mentions, is simply deteriorating to the point of frightening proportions. This should start as early in the acquisition process as possible, but again the fear-factor prevents government from collaborating with industry effectively, at the detriment of the requirement and the ultimate contract award.

Government personnel need to understand that if they do their jobs properly, protests should be sour grapes. It is the risk-aversion here that is a major issue.

Nonetheless, the current state of affairs when it comes to protests is only going to worsen unless accountability is brought into the fray.

Looking at the recent Government Accountability Office (GAO) report on protests, it is hard to not think that protests are out of control. Here is where I strongly agree with IBM’s report, as I have been an advocate of protest accountability for some time. How can one argue that some protests are not simply frivolous? I know of a company, an incumbent on a contract that lost a recompete, who admitted filing a frivolous protest to bilk the government for another three months of revenue while GAO made the decision. The basis for the protest bordered on absurd, but how often does that happen? More often than you think. It is a business decision no doubt, but only at the expense of the taxpayers and the mission.

Protests are disruptive, and firms need to be held accountable for reimbursing the government for losing protest after protest. Further, this is a demonstration of a bad actor, and should also be included in a firm’s past performance rating.

Conversely, firms should automatically be compensated for protests fees should they be upheld. It is a two-way street, and needs to be treated as such.

Protests are a fundamental right by a firm to correct a deficiency by the government. However, the data indicate that this right is being abused. Let’s bring this situation under control, and move forward.

Smaller Piece Of The Pie For Small Businesses

With the end of the fiscal year upon us, the “feeding frenzy,” as I like to call it, is in full swing. With possible sweeping budgets on the horizon through sequestration, and overall declines in revenues, agencies are unloading end-of-year dollars at a dizzying pace.  It should be particularly good times for small businesses, as opportunities should be plentiful.

Alas, that is not entirely the case. It is the same story, but amplified. Smaller sized contracts, especially those that use simplified acquisition procedures, are still going to large businesses. According to the Federal Procurement Data System (FPDS), it is on track to be about 40%.

Large businesses are getting a surprisingly larger share of contracts that should be going to small businesses because they are known commodities, with a wealth of past performance in a risk-averse environment. However, the lack of small business focus by federal buyers is the main reason.

The single greatest factor is the one true common denominator, the acquisition workforce. A recent story in the Washington Post highlighted the problems industry is facing through the rise of inexperienced federal buyers, and the difficulties in not only awarding contracts, but managing them as well.   

One of the greatest challenges small businesses face is this inexperience. We can all acknowledge that the acquisition workforce is overworked and under-resourced. However, that excuse does wear thin. People need to do their jobs at the end of the day, that phantom word in the federal vernacular; accountability.

As a result, insufficient, or simply no market research, is being conducted to qualify small businesses as eligible for a given solicitation. The question seems to be, why be bothered? I have this large company over here doing everything under the sun; so let me make sure they win this contract. They have all the vehicles, the past performance, etc. They are a known entity. Sounds like a plan!

It is the path of least resistance, as qualifying small businesses, conducting a Request for Information, simply doing a Google search, simply takes too much time. Further, many program offices should be conducting this market research, but many do not understand their roles and responsibilities in the acquisition planning phase. A major point I make in training classes to PMs during Acquisition 101 classes.

The trend of awarding “small business” contracts to large businesses is endemic, and will not abate anytime soon. Small businesses can continue to hope for crumbs, or that someone in Congress actually pays attention to real issues affecting small businesses.

Forget Talk of Policy: Focus on People

Since coming onboard as new Administrator of The Office of Federal Procurement Policy (OFPP), Joe Jordan has seemingly looked to policy, regulations, and guidance on tactical execution to help solve the procurement woes that are being faced by the federal government.

However, it has been some time since OFPP focused on what really is the problem, the acquisition workforce.

Granted Mr. Jordan discussed workforce in an interview with Federal Computer Week, and I hope he does indeed focus on it.

However, without a highly trained and functioning acquisition workforce, no initiative or improvements in the abysmal track record of government spending is possible.

Most new “initiatives” are treated with either derision, open hostility, or simply ignored due to lack of attention or even awareness. I recently asked a group of contract specialists about their use of open communication techniques, in accordance with OFPP’s “MythBusters” campaign, and you would have thought I was speaking another language by the blank stares I got.

One of the most respected (definitely by me) thought leaders in this profession, Vern Edwards, said it best on a recent post on this very issue:

…In a complex system like acquisition, any attempt to fix deep seated system faults through policy will fail. The only way to get at the deep seated problems in acquisition is through workforce improvement, and I don’t mean numbers. We need well-educated, superbly trained people for the big stuff, and we do not have enough of them. Mismanagement and poor leadership will prompt many of the best of the new recruits to leave. The problems are beyond the reach of management in the organizational structure we have now for the simple reason that no one is in charge. Only someone with the power and the ruthlessness of a Stalin could fix the system. A few purges might be just the thing…

It is the cold, hard truth. We need to focus on people, and not the numbers as I have previously discussed (here, here and here).

Focusing on tactical issues can certainly help, especially focusing on performance based contracting, better requirements development, and better communications and collaboration with industry. Nonetheless, the state of the acquisition workforce gets worse every day, and the hole keeps getting deeper.

You won’t hear that in any Presidential debate or attack ad. It is easier to focus on the symptoms rather than the disease.