AVOIDING LANDMINES : Lessons Learned from. Subcontract Source Selections. by Daniel J. Finkenstadt

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1 AVOIDING LANDMINES : Lessons Learned from Subcontract Source Selections by Daniel J. Finkenstadt 22 Contract Management May 2015

2 This article calls for federal agencies to consider developing guidance particular to managing subcontract source selection scenarios to aid their workforce in promoting competition to new, innovative levels, while avoiding potential landmines. Contract Management May

3 AVOIDING LANDMINES : LESSONS LEARNED FROM SUBCONTRACT SOURCE SELECTIONS Competition in contracting is a mainstay of federal acquisition. Since the inception of the Competition in Contracting Act in 1984, the federal government has striven to increase competition to reduce prices, incentivize improved performance and meet socioeconomic and public policy goals to the maximum extent practicable. 1 Contracting officers are required to promote full and open competition in solicitations and awards, 2 though seven exemptions exist in the Federal Acquisition Regulation (FAR) to allow contracting officers to use other than full and open competition. FAR (c) requires the use of FAR , Competition in Subcontracting, for all but a small sub-set of negotiated federal contracts. This clause essentially flows down the requirement to seek full and open competition to the maximum extent to prime contractors. The quintessential Better Buying Power specifically calls for agencies to promote effective competition by looking for ways to [e]mphasize competition strategies and create and maintain competitive environments and to [i]ncrease small business roles and opportunities. However, anecdotal evidence and reports from the Department of Defense (DOD) inspector general show that acquisition functions tend to either seek full and open competition or limit their sourcing to a single contractor. 4 This article seeks to advocate selective divergence from the traditional all or nothing approach to competition by suggesting a federal procurement focus on subcontract competitions. Opportunities are especially ripe in instances where aspects of a project or system development cannot reasonably be competed as an overall system contract, but may glean sizeable cost and innovation benefits by opening up the competitive landscape below the prime contract level. This article seeks to advocate selective divergence from the traditional all or nothing' approach to competition by suggesting a federal procurement focus on subcontract competitions." A DOD inspector general report published in December 2012 found that all 32 sole-source actions reviewed at the Naval Supply Systems Command Weapon Systems Support (NAVSUP WSS) Philadelphia Site cited FAR , Only One Responsible Source and No Other Supplies or Services Will Satisfy Agency Requirements in their justifications for using other than full and open competition. 5 Further, the NAVSUP WSS did not properly synopsize the requirements for all 27 of the 32 requirements that required such a synopsis. 6 This is an example of not only failing to provide due diligence in assessing the exception justification, but also in not providing for growing subcontract prospects below the prime level by properly synopsizing the opportunity per FAR Part 5. Agencies that tend to operate in environments that are justifiably and chiefly sole-source situations (such as research and development and state-of-the-art systems programs) could benefit from conducting market research to determine the ability to promote competition below prime system developer/integrator levels. The U.S. Army recently found that it could develop a competitive environment at the subcontract level for its Warfighter Information Network-Tactical Increments 2 and 3 and thereby improve the agility of its acquisition life-cycle process. 7 Other programs have found that maintaining full system integration responsibility at the prime contractor level prevents unacceptable delays and undue duplication of costs 8 that may result from utilizing secondary primes for subsystem development and transferring the subsystem as governmentfurnished equipment. Allowing sole-source prime contracts with directed subcontract competitions allows for subsystems to be treated as contractor-furnished equipment, limiting the government s integration liability while reaping financial and socioeconomic benefits of promoted competition to what one can reasonably consider the maximum extent practicable. Additional cases for monitoring a subcontract source selection may also arise out of the make-or-buy program process to ensure negotiation of reasonable contract prices, 24 Contract Management May 2015

4 AVOIDING LANDMINES : LESSONS LEARNED FROM SUBCONTRACT SOURCE SELECTIONS satisfactory performance, or implementation of socioeconomic policies. 9 It may also be used in such cases where the government wishes to mitigate inherent organizational conflict of interest (OCI) concerns that arise from having a prime both compete against industry and being essentially the source selection decision authority in making make or buy determinations. Of additional benefit is the keen insight into possible teaming agreements between the prime and its potential subcontractors. A recent article in the February 2015 issue of Contract Management highlights the risks of prime/sub teaming agreements that fall out into litigation. 10 Early insight into the selection of these subcontract partners may aid the government in avoiding or mitigating risks of teaming agreement disputes. 11 How does one go about conducting or managing a subcontract source selection? The concept of subcontract source selections is ill-defined at best. The FAR itself provides no direct guidance or policy on how to successfully navigate the sensitivities of such an unconventional competition methodology. However, recent efforts by defense systems procurement activities are producing a body of useful lessons learned. The activities have noted a need for particular attention toward procurement integrity, OCIs, and protecting privity of contract for the prime. Procurement integrity is primarily guided by FAR and concerns issues such as improper disclosure of source selection information, kickbacks, gratuities, and other ethical violations that must be protected against at all times, but at even greater degrees when the government has direct insight into a subcontract source selection. OCI is described by FAR Part 9.5 and can increase risk to protests due to allowing certain offerors to have unequal access to information, use of biased ground rules in the source selection process or impaired objectivity in the evaluation process. Privity is an inherent concern in subcontract interactions for monitoring and consent. Performance liabilities may also exist when consenting to a subcontract. Consent requirements are driven by FAR Part 44, but are further detailed by individual agency procedures to protect breach of privity. A breach of prime/subcontract privity by the government is the leading risk to opening the government up to subcontract source selection protests. Contracting officers may derive a general approach to managing a subcontract source selection by leveraging these FAR parts, as well as a robust review of jurisprudence from related court cases. FAR , Subcontracts, or an adequate supplement should be used to mitigate the performance liability risk. FAR (f) places this liability square on the prime contractor unless the contracting officer consent specifies otherwise. Contract Management May

5 to CM Magazine: We re looking for articles on commercial contracting! FAR KNOWLEDGE: THE KEY TO CREATIVITY AND INNOVATION DEFENSE SUBCONTRACTORS PROTECTED AGAINST WHISTLEBLOWER RETALIATION February 2015 $12.00 Voice of the Professional Contract Management Community ENOUGH IS ENOUGH: A CONTRACTOR'S RIGHT TO STOP WORK MISSION-FOCUSED ACQUISITION MANAGEMENT As a contract management professional, your personal experiences in the field can be valuable to readers. Particularly of interest are articles of a how-to nature with practical, problem-solving instruction that can be used on the job. March 2015 $12.00 Voice of the Professional Contract Management Community MAXIMIZING VALUE OUT OF PAPER-TO- ELECTRONIC SUBCONTRACT FILE CONVERSION April 2015 $12.00 GUIDE Voice of the Professional Contract Management Community THE CONTRACTOR'S TO MANAGING COST-TYPE CONTRACTS Greater OUR CHAT WITH JIM P. WOOLSEY, PRESIDENT, DEFENSE ACQUISITION UNIVERSITY Check out the NEW upgraded digital edition of the magazine! User-friendly and easy to read on any device! F O C U S CREATING VIRTUAL ACQUISITION TEAMS THAT ACHIEVE PEAK PERFORMANCE Check out the NEW upgraded digital edition of the magazine! User-friendly and easy to read on any device! Scan here to view the digital edition of this issue or visit Send manuscripts or queries to: Kerry McKinnon Hansen khansen@ncmahq.org Submission Guidelines Learn more about the submission process at contribute.

6 AVOIDING LANDMINES : LESSONS LEARNED FROM SUBCONTRACT SOURCE SELECTIONS A review of relevant court cases from the U.S. comptroller general show that privity concerns are the earliest threat to a successfully managed subcontract source selection. 12 Optimum Systems, Inc. 13 is recognized as a highly precedential case for determining the ability of a potential subcontract offeror to protest a prime contract source selection. This case asked the key policy question of whether or not the comptroller general should consider subcontract protests. 14 The considerations listed in FIGURE 1 on page 25 from this case are paramount in structuring subcontract source selection criteria and practices. Protecting against subcontract source selection protests is a key factor in successfully meeting the government s requirements while advancing competition goals. However, protecting against protest is not the only reason for carefully managing the process. As previously discussed, there is a desire by the government to balance protecting privity with ensuring enough involvement to protect against OCIs and procurement integrity concerns. The following lists provide useful lessons learned from agencies to manage OCIs and procurement integrity risks. Organizational Conflicts of Interest Ensure the prime contractor and government coordinate a robust OCI management plan for the source selection that flushes out all risks to biased ground rules, unequal access to information, and impaired objectivity. Ensure the plan has sound approaches to avoid these as much as possible and to neutralize or mitigate in a robust manner when an avoidance approach cannot be provided. Utilize source selection and request for proposals document and process reviews to ensure there are no biased ground rules in the prime s evaluation criteria or requirements that favor one potential offeror or another. Ensure that the prime is protecting against impaired objectivity in cases where selecting a particular subcontractor over another may benefit them financially based on reciprocal second-tier subcontract sourcing strategies (e.g., a potential subcontractor proposes to purchase parts or services from the prime or its subsidiaries and the prime contractor intends to include this in its evaluation considerations) or other means (e.g., ownership of potential subcontractor stock by the prime or its evaluation team members). Ensure the prime contractor or government observers do not discuss or share the particulars of the acquisition with a single offeror without providing such items of discussion to all potential offerors to prevent unequal access to information. Procurement Integrity Get involved early with the prime contractor in market research to maximize the subcontractor field to promote full and open competition. Use of industry days and site visits to prospective subcontractor facilities with accompanied capabilities briefings may enhance the government s ability to assess the competitive field and potential for meaningful subcontract competition. (Note: This is another area where the government should observe but not get overly involved in the process to protect against the perception of favoritism or providing unequal access to information to one offeror over another.) Use nondisclosure agreements (NDAs) to the maximum extent practicable between the prime and potential offerors to protect against subcontract source selection sensitive information spillage. (Note: Government personnel are prohibited by the Trade Secrets Act from disclosing such information; thus, an NDA may not be required. However, just-in-time training from agency contracting and legal representatives is recommended.) Utilize robust procedural and system firewalls at all levels to protect against subcontractor source selection information between the prime and government team and/or other potential offerors. Ensure that the prime contractor does not unequally communicate requirements or hold unequal discussions with one offeror over another. Always protect against fraud, gratuities, kickbacks, and ethical violations by the prime as one would if it were a governmentrun source selection. Contract Management May

7 AVOIDING LANDMINES : LESSONS LEARNED FROM SUBCONTRACT SOURCE SELECTIONS Conclusion The benefits of subcontract source selections can be high with careful planning and oversight. In situations where the government must maintain an incumbent prime, such as follow-on development efforts where duplicative, nonrecurring engineering costs and schedule loss are untenable, the government may still promote for effective competition to the maximum extent for sub-system or support service subcontracts by directing the prime to conduct a source selection. The author experienced this in a recent government-directed subcontract source selection for a multimillion-dollar sensor for use in space. The efforts to promote competition at the subcontract level realized over $90 million in cost avoidance by competing sensor subcomponents amongst the industrial subcontract base. Such practices can ensure FAR Part 15 requirements for the government to ensure fair and reasonable subcontract pricing, past performance evaluation, and FAR Part 44 consent requirements can be more transparently and effectively met. Agencies could maximize the benefit by allowing the use of subcontract competition dollars in meeting annual competition goals. ABOUT THE AUTHOR DANIEL J. FINKENSTADT, CAPT. (USAF), CFCM, is a procuring contracting officer serving at the National Reconnaissance Office (NRO) in Chantilly, Virginia. He has 12 years experience in contracting and currently serves as a warranted contracting officer responsible for multiple NRO major systems acquisitions. The author would like to recognize the research contributions to this article of Ryan King and Herman Gaskins. Send comments about this article to cm@ncmahq.org. ENDNOTES CFR As per 10 U.S.C Under Secretary of Defense (Acquisition, Technology, and Logistics), memorandum, Better Buying Power 2.0: Continuing the Pursuit for Greater Efficiency and Productivity in Defense Spending (2012). For more information, see 4. Ibid. 5. DODIG , Better Processes Needed to Appropriately Justify and Document DAVSUP WSS, Philadelphia Site Sole-Source Awards (December 2012). 6. Ibid. 7. GAO , Army Networks Select Programs Are Utilizing Competition to Varying Degrees (May 2014). 8. See FAR (a)(2)(ii). 9. FAR See Stephen P. Mulligan, How to Improve Your Teaming Agreement, Part 1 of 2, Contract Management Magazine (February 2015). 11. See ibid. 12. See Optimum Systems, Inc., 54 Comp. Gen. 767, B (March 19, 1975). 13. See ibid. 14. Ibid. It should be noted that heavy insight and involvement in the subcontract source selection process may permit the prime to consider such a source selection chargeable to the government and further open up the government to subcontract protest risk if the aforementioned privity risks are not considered and properly managed. Further, the risk of excessive pass-through costs could increase and should be monitored carefully. However, if the selection is managed correctly, the government may find ways to creatively increase competition, understanding, and best value by directing subcontract source selections when in its best interest. CM 28 Contract Management May 2015

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