Congress, Obama set boundaries for contractors

No one in Congress or the Obama administration is beating the drum for a new generation of acquisition reform, but a reform of sorts is under way nonetheless, and it might not be to the liking of contractors.

Lawmakers stuffed the 1,200-plus-page conference report attached to the fiscal 2010 National Defense Authorization Act with provisions addressing how agencies buy technology and services.

Of particular concern is the relationship between agencies and contractors. Lawmakers say contractors are being allowed too far into the inner workings of agencies and coming too close to inherently governmental functions. Companies are selling services more than commodities, and the analytical and advisory services they sell put contractors next to agencies’ decision-makers, according to Congress.

As a result, lawmakers are mandating a review of those services. In particular, they want to know whether regulations and official guidance are keeping contractors in check.

They also want DOD’s annual budget justifications to include information on the types of services the department intends to outsource and how many contractor employees are needed to do the work. DOD officials will then need to justify why those services are necessary, according to the report.

The Obama administration also is subjecting contractors to more scrutiny. A proposed rule published in the Federal Register last week would seek to minimize excessive "pass-through" charges by contractors from subcontractors, when the prime contractor added little or no value to the contract.

All contractors mark up their costs to make a profit. However, some companies that have been awarded a contract pass off all of the work to subcontractors. The company with the contract might just be adding another layer of markups, or pass-through charges, without doing anything else of real value. And with too many tiers of subcontractors, and thus multiple markups, the government's costs continue to rise.

The interim rule includes a solicitation provision and contract clause that require firms offering bids for a contract to identify the percentage of work that they will subcontract. Officials want to know when subcontract costs will exceed 70 percent of the total cost of the work, the proposal states. Regulators chose 70 percent as the threshold because it represents a substantial amount of subcontracting, the notice states.

“The rule is intended to protect the interests of the government,” the notice states. It adds that officials do not intend to disrupt the subcontracting process or other arrangements between firms.

In another interim rule announced last week, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council proposed limits to award fees for contractors’ performance.

The rule would require agencies to link award fees to acquisition objectives in the areas of cost, schedule and technical performance, the notice states. Agencies cannot give a contractor an award fee if the overall performance is judged to be below satisfactory.

The interim rule also would prohibit the rollover of unearned award fees from one evaluation period to another. Rolling over award fees allows a contractor to earn the lost award fees in a subsequent evaluation period.

“The councils believe 'rollover' diminishes the effectiveness of the award-fee rating given for a specific evaluation period,” the notice states.

Officials point out that the rollover concept is used sparingly in government and that its limited use has been decreasing.

Meanwhile, the lack of competition for government contracts continues to concern Congress.

The DOD authorization bill conference report includes language that would make it more difficult for contracting officers to award sole-source contracts. The provision, which would apply governmentwide, would require contracting officers to explain why a sole-source contract worth more than $20 million is in the government’s best interest.

The justification, which must be approved by a designated official, also must make the case that the cost of the contract is reasonable compared to prices offered in a competitive bidding process.

The Government Accountability Office found good cause for congressional concern, particularly when it comes to blanket purchase agreements.

Ideally, agencies award multiple BPAs in a given product or service category, keeping the heat on the vendors to minimize prices. However, in a recent study, auditors found that 60 percent of the 336 BPAs in its sample lacked competition. In one particularly egregious case, a BPA had an estimated value of nearly $60 million, according to the report.