As any contractor knows that

Transcription

1 16 Contract Management August 2011

2 Contract Management August

3 contractor purchasing system reviews a tale of two companies As any contractor knows that has undergone a contractor purchasing system review (CPSR), expects to go through a CPSR, or, most especially, has failed a CPSR, failing a CPSR can have significant adverse consequences. So it is interesting to see that some companies don t take CPSRs seriously or are outright resistant to the changes needed to be compliant. A CPSR is essentially a risk mitigation tool used by the U.S. federal government to evaluate the efficiency and effectiveness of a contractor s purchasing system. This involves ensuring that in the contractor s purchasing of products and services in support of the government, the government s interests are being protected in all respects related to those purchases and the contracts they support. This is done by evaluating areas such as public law compliance, proper use of government funds, effective price or cost analysis, promoting competition, management of suppliers and subcontractors to ensure quality and on-time deliveries, protection of the government s rights, furtherance of the government s socioeconomic goals, and more. Failing an audit can result in significant consequences that can have very negative effects on a contractor and its operations. Some of the significant consequences include: Impact to reputation; The need to develop a corrective action plan and adhere to it; Additional government oversight and scrutiny, including: o o o Corrective action monitoring, The Defense Contract Audit Agency or other audit agencies may be notified, and/or Possible additional audits by other branches or agencies of the government; Loss of a general competitive advantage; Loss of a specific competitive bid where an approved purchasing system is one of the factors considered; Inability to bid on solicitations that require an approved purchasing system; and The requirement to obtain the contracting officer s prior consent to all cost-plus or time and materials awards or for all fixed-price awards over certain 18 Contract Management August 2011

4 contractor purchasing system reviews a tale of two companies thresholds, depending on the entity awarding the contract. All of these carry impacts to the contractor s operations from additional costs and disruption to loss of revenue. Therefore, it is important to take the necessary steps to establish and maintain a compliant purchasing system. One of the more difficult situations is when a small company has crossed the threshold that often triggers a CPSR, as defined in Federal Acquisition Regulation (FAR) (a) as follows: If a contractor s sales to the government (excluding competitively awarded firmfixed-price and competitively awarded fixed-price with economic price adjustment contracts and sales of commercial items pursuant to [FAR] Part 12) are expected to exceed $25 million during the next 12 months, perform a review to determine if a CPSR is needed. Sales include those represented by prime contracts, subcontracts under government prime contracts, and modifications. The reason these situations are more difficult is that when such businesses were smaller, they developed habits or processes that were not compatible with a compliant system. This may have been due to a lack of resources and/or a lack of knowledge of the requirements. As such, having to work toward a compliant system that will pass a CPSR usually requires changes in processes and additional due diligence. Capping all of this is the need for a commitment by all levels of management to support, promote, and enforce the necessary changes. There will undoubtedly be greater or lesser degrees of resistance to change, running the gamut from whining and complaining to outright defiance. In fact, the level of management commitment to establishing and maintaining a compliant purchasing system is one of the components of the CPSR process. During the CPSR, the auditors will assess the level of management commitment in their evaluation. If the administrative contracting officer does not believe there is such a management commitment, he or she may decide there is sufficient risk to the government to require a CPSR or to withhold or withdraw approval of the purchasing system. A Tale of Two Companies Company A and B are both businesses that used to be small companies, but have since graduated to a level meeting the FAR requirement noted above and are now required by their administrative contracting officers to undergo a CPSR. Both developed processes and habits that were not compatible with a compliant purchasing system. Company A Company A underwent its first CPSR and failed badly, resulting in the Defense Contract Management Agency (DCMA) issuing eight recommendations. Company A developed a corrective action plan, which the administrative contracting officer accepted. However, over the course of the next year, the plan was not adequately followed and compliance was not enforced by the buyer responsible for compliance, who did not have the full cooperation of the programs. The failure was not so much a result of resistance to change, but more to a lack of taking the matter seriously, being diligent, and having the level of knowledge and experience to know how to be compliant. As a result, when a second CPSR was conducted a year later, Company A failed almost as badly as it had failed the first time, improving slightly from eight recommendations issued by DCMA to six. In fact, the DCMA reports for each were almost identical in that all of the failures found in the second CPSR were failures found in the first, and almost to the same extent. At this point, the administrative contracting officer withheld approval of Company A s purchasing system. After the second failure and the administrative contracting officer s withholding of approval of the purchasing system, Company A took different and significant steps to correct the failures. It developed a corrective action plan, which was accepted by the Contract Management August

5 contractor purchasing system reviews a tale of two companies It is essential that all levels of management determine that they are committed to compliance and the change needed to get there. administrative contracting officer. The plan included the hiring of a subcontracts compliance administrator and a purchasing manager, both well experienced and knowledgeable of CPSR and compliance requirements. The subcontracts compliance administrator was responsible for all agreements, including flow-down of necessary or applicable contract flow-down terms and conditions. He also provided a post-award audit of purchasing and subcontract files for CPSR compliance, completeness, and organization. The purchasing manager was made responsible to ensure that compliance was enforced prior to purchase orders being issued. As such, prior to any purchase order being released, the manager required submission of a compliant file for review. In addition, the manager was responsible for providing training in compliance- and purchasingrelated disciplines. CPSR training was provided almost immediately, followed by training in related areas such as price/cost analysis, notification and consent, Truth in Negotiations Act compliance, competition and source justifications, etc. Finally, having twice failed the CPSR and having its purchasing system approval withheld, Company A s level of commitment by management increased including at the programs level to ensure compliance. The purchasing manager and the programs worked together to find ways to minimize delays resulting from some of the compliance requirements and to be compliant without hindering the ability of the programs to get their work done. On the few occasions that people challenged the requirements and change, management stood strong in supporting the purchasing manager and for compliance. As a result of these efforts, Company A underwent its third CPSR a year after its second failure and passed with flying colors, with zero recommendations or observations, resulting in the administrative contracting officer providing approval of Company A s purchasing system. Company B Company B knew that a CPSR would be required of it in the next year or two and hired a purchasing manager knowledgeable and experienced with CPSRs to establish a CPSRcompliant purchasing system. Company B and its management had no real knowledge or experience with CPSRs and what it would take to be compliant. Therefore, the purchasing manager was brought in to be the resident expert. Management expressed support for establishing a compliant system; however, this was not backed up in practice. Unfortunately, there was little support from management at any level, whether functional, the programs, or the heads of business units. One director even took the view that maybe the company needed to fail so that people would learn. While he may have been correct that people would learn, this is not the way to lead; and given the adverse impacts to the business, this is not an effective way to learn. The programs continually complained, saying they had never had to do this before, or never had to do it at prior companies at which they worked, or that their competitors did not have to do these things despite evidence to the contrary provided by the purchasing manager. In addition, the programs were not taking into account that the other businesses they claimed did not have to do these things might not yet be under the eye of DCMA for compliance due to their size. Instead of supporting the purchasing manager and trying to find ways to revise processes and support and promote compliance, the programs continued to whine and complain and to exaggerate and misconstrue the issues to both functional and upper management. Upper management took the program s complaints at face value without investigating them and consulting the purchasing manager. As a result, when the CPSR was conducted, Company B barely passed, with several recommendations made by DCMA. However, this wasn t necessarily a desirable outcome. While it is good that Company B passed and avoided the more significant consequences of failure, having barely passed also carries consequences. Company B had to develop and comply with a corrective action plan. It would also likely be viewed as a higher risk contractor and would be subject to greater scrutiny by the government and would likely have to undergo its next CPSR much sooner than if it had passed without recommendations. Finally, it runs the risk that the programs and management will think they did enough to be compliant and become complacent, even though the DCMA recommendations clearly indicate deficiencies. As such, while Company B passed this time, it may be harder to do so next time. Lessons Learned Passing a CPSR is not easy, but it is necessary to avoid the potentially significant adverse impacts discussed above. Companies going through it for the first time or with a difficult history in prior CPSRs must embrace the need for compliance and accept the changes needed to establish compliance. Some companies will struggle with resistance, ranging from outright 20 Contract Management August 2011

6 In the Crazy World of ContraCt ManageMent you re CoMpletely Certifiable Eliminate the Day-to-Day Insanity of Managing Contracts Get certified! Villanova University s 100% online NCMAendorsed programs help you acquire the skills you ll need to become NCMA certified. Through video-based e-learning, you ll obtain crucial knowledge in vital areas including: Federal and Commercial Contract Law Defining and Planning Contracts Budgeting and Negotiating Contracts Contract Management Best Practices Excel With a Master Certificate Demonstrate your expertise in one of the world s fastest growing disciplines by earning a master certificate * online from Villanova, ranked by U.S. News & World Report as the #1 Regional University in the North for nearly two decades. Gain skills to obtain certification with specialized knowledge in fully interactive programs: Master Certificate in Commercial Contract Mgmt. Master Certificate in Government Contract Mgmt. Getting Certified These 100% online programs prepare professionals to earn NCMA certifications, including CFCM, CCCM and CPCM. Prepare for Career-Building ncma Certifications VillanovaU.com/nCMACertifiable *Corporate programs and rates are available All Rights Reserved. Made Available by University Alliance The Nation s Leading Universities Online. SC: zv1 MCID: TraDITIon. academic ExCEllEnCE. online ConvEnIEnCE.

7 FEDERAL PUBLICATIONS SEMINARS INTERNATIONAL CONTRACTING WEEK: EXPORT CONTROLS, FCPA, FMS Join your peers and prestigious faculty for this comprehensive week of training. MULTIPLE OFFERINGS TO CUSTOMIZE YOUR WEEK OF TRAINING EXPORT REGULATIONS AND TRADE SANCTIONS - Basic ITAR - Advanced ITAR - ITAR Compliance: Disclosure and Audits - EAR and OFAC Fundamentals: Export Control of Dual-Use Equipment, Technology, and Services - EAR Compliance and Enforcement - International Compliance and Risk Mitigation - Foreign Corrupt Practices Act (FCPA) ARMS SALES AND DEFENSE CONTRACTING - Battlespace and Contingency Contracting - Foreign Military Sales OCTOBER 24 28, 2011 AMA EXECUTIVE CONFERENCE CENTER 2345 Crystal Drive Arlington, Virginia FOR COMPLETE DETAILS AND TO REGISTER Visit fedpubseminars.com INTERNATIONAL CONTRACTING - International Government and Commercial Contracting 2011 Thomson Reuters 8-11 Thomson Reuters and the Kinesis logo are trademarks of Thomson Reuters.

8 contractor purchasing system reviews a tale of two companies It is important to take the necessary steps to establish and maintain a compliant purchasing system. resistance, as with Company B, to a lack of taking it seriously enough and applying the right resources, as with Company A. No matter which environment leads to failure or to recommendations requiring correction, given the same outcome, the negative impacts can be the same. The situation involving outright resistance obviously carries with it a much greater level of frustration and discomfort to all parties. It is essential that all levels of management determine that they are committed to compliance and the change needed to get there. It is also essential that the purchasing manager socialize the needed changes and work regularly with the programs and operations to help them understand the new requirements and to find ways to minimize any delays or hindrances to their work, but that still foster compliance. Skipping necessary compliance steps is not an acceptable option, but there may be ways to approach these steps that work better than others. and to be compliant, there is even greater pain in failing the audit and having the purchasing system approval withheld or withdrawn. CM About the Author BRYAN FELBER, MBA, is a purchasing manager and is responsible for CPSR compliance at Kratos Defense & Security Solutions, Inc., in San Diego, California. He is also a member of the San Diego Chapter of NCMA. Send comments about this article to cm@ncmahq.org. FEDERAL PUBLICATIONS SEMINARS CONTRACT COMPLIANCE WEEK A WEEK OF COMPREHENSIVE GOVERNMENT CONTRACTS COMPLIANCE TRAINING - Supply, Service, and Construction Contracting - Business Systems and Internal Controls - The New Mandatory Disclosure Requirements - Fraud Enforcement - Wage and Hour Compliance - Task and Delivery Order - Multiple Award Scheduling October 24 28, 2011 The Melrose Hotel 2430 Pennsylvania Avenue NW Washington, D.C. fedpubseminars.com While there may be some pain, maybe a great deal of pain, in changing processes 2011ThomsonReuters 8-11 Thomson Reuters and the Kinesis logo are trademarks of Thomson Reuters. Contract Management August