Top Five Small Business Mistakes After Winning a Federal Government Award (part 3 of 5)

Third post in a series.

Mistake Number 3: Not understanding the DCAA and DCMA roles
Another key mistake is to misunderstand the roles these supposedly independent agencies play in the government contracting industry. In our experience, we found that they do share the mission to reduce contract values by any and all means possible. Although you probably won’t find this written down anywhere, except as a “save taxpayers money” doublespeak. I promise you, however, that a DCAA auditor that consistently does not find “something wrong” with contractor cost calculations will probably be banished to the children’s table at their annual agency picnic! Same is true, though with a twist, of DCMA staff, particularly the Administrative Contracting Officers or the ACOs. An ACO who fails to perform as a de facto employee of DCAA and follow the auditor “recommendations” will probably not be invited to DCMA’s holiday party.

For those who may find this critique of the agencies harsh, first I again remind you that my opinion is based on our direct experiences with the two agency staffers – and the fact that we still are trying to get paid on a contract that we delivered in 2005. Next, I would also refer to you to 2008 review of DCAA where whistleblowers unambiguously reported improper influence by DCAA supervisors that resulted in findings (DCAA-speak for audit results) more favorable to large federal contractors, as reported here. As for DCMA, a recent Inspector General’s review of the DCMA operations in Afghanistan found that “of of the 221 DCMA personnel training records reviewed from a universe of 1,170 from FY 2004 through FY 2009: 103 DCMA personnel were not fully qualified for the position occupied, and 57 quality assurance representatives did not have or could not produce proof of Defense Acquisition Workforce Improvement Act certification.” If an agency fosters such a defective management infrastructure that it handles assignments to support a decade-old war in such a shabby and sub-standard way, how much care and thought do you think DCMA’s leadership has put in equitably treating your little two- or three-man small business? You can read the Inspector General report here.

Now that we have hopefully established the environment where small businesses must function, you need to absolutely understand that despite what FAR says, ACOs will typically only act as executioners of the DCAA audits. This means two things – First and foremost, in our direct experience, the whole “DCAA only makes recommendations” is just pure, unadulterated deception. The ACOs who do not carry on DCAA’s “recommendations” are often chastised. In fact, DCAA has an internal process set up for auditors to report ACOs that show any sign of anything but full submission to DCAA’s will. Secondly, don’t expect any help from your ACO. Assuming s/he actually understands the problem, chances are the ACO won’t risk his or her pension or promotion just to be fair or equitable. And invoking FAR 1.602-2(b) won’t help either. Trust me, we tried with our ACO. I suspect all we accomplished was to give a him laugh.

Lesson Learned: While the above opinions are formed through our direct experience with both DCAA and DCMA, you should keep in mind that both agencies are huge and there is always chance that your experience will be different or, hopefully, at least a bit less punishing than ours. It does, just the same, make sense that you err on the side of caution and treat both DCMA and DCAA employees with civility but as adversaries.

Update…

I wanted to give  a quick update on our situation.

The government attorneys have asked us for a 60 day delay to investigate the ACO error. They took this step after we secured written proof from the Defense Finance and Accounting Service (DFAS) that corroborated our claim of how much we were paid on the contract in question, in 2004. As I’ve said before, that amount is some $60,000 less that what the ACO had claimed.

We continue to believe that an ACO error on such a basic element as cash payments on a contract, proves he never really cared enough (or at all) to learn the facts of the case; and that he simply was going to act as a DCAA enforcer-employee, no matter what. However, we did agree to their request and, of course, are curious as to what the DCMA attorney will come up with next. Our attorney thinks they (DCMA) have now realized they “screwed up” and will try to settle this quietly. I think the DCMA attorney, once shown irrefutable proof of DCMA error, needed time to re-structure her case, and will attempt to come at us from a different angle. I don’t think she gets any points from DCMA leadership if she does the right by a small business, or has any personal desire to do so since, after all, we had given her fairly strong reasons to believe the accuracy of our assertions before – which she simply ignored.

But we’ll see. I will of course keep you posted.

Top Five Small Business Mistakes After Winning a Federal Government Award (part 2 of 5)

Second post in a series.

Mistake Number 4: Not Understanding the difference between the deliverables and the contract

Almost all small businesses new to federal contracting get this wrong at least once. In an odd paradox, the more experience small business founders have with commercial contracting, the more likely they will miss this point.

You need to understand that after the contract is signed the government actually does not at all care what you deliver as long as (a) it matches the negotiated, customary, or industry-standard quality, and (b) it is precisely as written in the Statement Of Work attached to the contract, or a follow-on modification. The next thing you have to comprehend is that the agency personnel you are working with on the delivery, i.e., the customers or end users, are going to be long gone when the Defense Contract Management Agency (DCMA) decides to uphold a Defense Contract Audit Agency (DCAA) audit review that disallows a big chunk of your costs because the costs did not support contract deliverables. In our case, for example, the DCAA disallowed pizza and snacks we occasionally included in our engineering meetings. To me, as a co-founder, it was money well-spent because we didn’t lose momentum by breaking for lunch. The DCAA auditor did not see it that way. I will always remember his comment that “we don’t get pizza here [at DCAA] when we have to work through lunch.” It wasn’t a lot of money – If I recall correctly, the bill for an entire year was less that $1000. So we just shook our heads and let it go. However, the costs could easily ad up if you, even at your customer’s request, incur travel expenses, use material, or perform tasks that were not included in the original budget or a follow-on modification.

Lesson Learned: Working for the federal government is not the same as working for a private entity. Most things that would make you a “preferred vendor” in the private world (e.g., on time and on budget delivery or going beyond the contractual obligations) do not mean a thing to the federal government. Mistaking deliverables for the contract IS an expensive error that could, easily, push you into bankruptcy. So take the time to learn what is in your contract, particularly with respect to the governing FAR clauses.

How DCMA Works as an Institution

In the past posts, I have stated that in my opinion DCMA institutionally supports a defective management and supervisory structure that encourages its personnel, specifically the ACOs, to abuse small businesses and lower contract values by as much as possible. This attitude seems to be entrenched in every aspect of how DCMA conducts business, including their legal department. This is critical to comprehending how DCMA works since, universally, attorneys have an obligation, as so-called officers of the court, not to knowingly advocate a position that they know is wrong. Yet, DCMA attorneys seem to be rather fine with knowingly advocating an erroneous position.

So what makes me say this?

Since this matter started, we have twice provided the DCMA attorney sufficient proof that our ACO, Mr. Craig Studley, made a significant error in determining how much money Quimba was paid on the contract in question in 2004. First proof was a signed statement from me, stating how much we actually were paid. The second piece of proof was a statement we obtained from the officials at the Defense Finance and Accounting Service (DFAS) that confirmed my statement. In short, there is no doubt that ACO Studley made a mistake – and if an ACO can’t even get the “how much” part right, it stands to reason that he never actually paid any attention to any documents provided by us, including detailed correspondance.

You would think that with so much overwhelming proof as the statement by another branch of the DoD, the DCMA attorney would be inclined, if not required, to stop pushing along the legal path. You’d think that but you’d be wrong. In fact, a couple of days after we provided the DCMA attorny with my signed statement, she filed a motion (with ASBCA) to dismiss our complaint on jurisdictional grounds. Curiosuly, at the time she filed her motion, we had only filed our notice of intent to file and the actual complaint was not filed yet. The message this clearly sent me was that she was not at all interested in right or wrong. She saw a potential technicality she could exploit and she was going to exploit it.

There is a good chance that her motion will be granted and we will have to file a complaint with the Court of Federal Claims – making this even more expensive and arduous for Quimba EVEN BEFORE we are heard by a judge.

And that, my friends, is the best evidence of the kind of organization the DCMA leadership fosters.

People in this post:

Bob Dourandish – bob@quimba.com
Craig Studley – Craig.Studley@dcma.mil
Srikanti Schaffner, Esq., Srikanti.Schaffner@dcma.mil

Top Five Small Business Mistakes After Winning a Federal Government Award (part 1 of 5)

I have gotten a number suggestions via email asking to include Lessons Learned while I share our story. I think that is a terrific idea. I’ve put together five key lessons we learned and will interweave these lessons as we continue. Thanks for your suggestions, and reading our blog.

To provide context, let me note that for small businesses, particularly those still in the startup mode, winning a federal government contract (or grant) is cause for celebration. Because most federal awards are made on competitive basis, the win validates the company’s product, service, or research idea. Even more importantly, it brings in cash that could, theoretically anyway, put the company on the path to growth. Unfortunately, the win could also put your small company on a long and painful road to disappointment, even bankruptcy, leaving it, as well as its founders and directors open to significant abuse.

In my experience, small businesses in the government contracting industry tend to make five key mistakes. Sadly, I speak from direct experience.

Mistake Number 5: Rushing through the negotiation cycle
After being notified of selection, you will enter negotiation with a Procurement Contracting Officer (PCO). You need to understand that government employees do not operate under the same constraints, performance criteria, or incentives as is the norm in the private industry. Further, you’d be well-advised to keep in mind that, as a general rule, the government has forever to make a decision. This combination can create a frustratingly slow “negotiation” cycle for small businesses. You need to recognize that the negotiation pace is deliberate. It is designed to create a timing advantage for the government and the government will exploit it to squeeze you for every penny before the contract is signed. Most importantly, however, you need to accept this as a fair business practice.

In my experience, small businesses are far too anxious to “close the deal” and get the contract signed. As the result they end up cutting their own throat by accepting lower pricing (than what they bid) through terms, often with the government employee’s “guidance”. Our experience after winning our first SBIR Phase II award at Quimba serves as a very good case study.

Winning a Phase II award is a major accomplishment for any small business and, naturally, created a celebratory mood at Quimba. We just couldn’t wait to get started. However, when the Procurement Contracting Officer (PCO) reviewed our cost proposal, she objected that we had discounted our G&A and Overhead rates in order to bring the proposal under the congressionally mandated ceiling. That created a delay in the process. Eventually, she suggested that we use a different contracting vehicle, namely a Cost Sharing type contract. The catch? Cost Sharing contracts do not permit the contractor to receive a “fee” or profit. We, make that I, made the mistake of accepting the change. In making that decision I was primarily motivated by our cash flow problem. I therefore rationalized that we would leverage the award to win more contracts and make up for the loss of our profit on this one. As it turned out the award actually became a hindrance to any new contracts. We soon lost several bids because reviewers felt we had plenty of work at our staffing level and that additional awards represented a “delivery risk” to the government. In the meantime, since the fee component of a federal award is the only portion of the payment that the company has discretionary spending rights to, we did not, despite a very large contract, have the funds to hire sales staff or initiate any marketing programs to expand our business in the private sector.

Lesson Learned: We should have realized that the PCO would not factor in our best interest or needs when making her “suggestion.” We, again make that I, lost sight of the fact that the government and us were engaged in a zero-sum negotiation process. What we should have done is to renegotiate smaller deliverables and not to allow the PCO’s “guidance” take away our profit.

FAR 1.602-2(b): The Insider Joke

Mention FAR 1.602-2(b) to any contractor who has delivered more than a couple of contracts and you’ll probably get a sarcastic chuckle. The clause reads: “[The Contracting officer shall] Ensure that contractors receive impartial, fair, and equitable treatment.” What can go possibly wrong with so many warm-and-fuzzy words (“impartial”, “fair”, “equitable”) jammed into a clause the is part of the regulation collective that manages contractors’ relationship with the government?

What exactly do these words mean? Well, I confess. I haven’t a clue and wouldn’t want to venture a guess except to take the whole clause to mean that the government is, in a legal and contractual sense of the word, taking responsibility to ensure that a transaction meets a generally-acceptable level of fairness and equity. One of those “you know it when you see it” kind of situations. Yes, it is vague but given the context here, it is reasonable to interpret the clause as Uncle Sam’s explicit promise not to screw a contractor.

Now let me share the relevant details of our case and ask if you think DCMA, representing the United States of America, upheld the above promise and, specifically, whether or not our ACO, Mr. Craig Studley, did perform his duty. I’ll even invite you to judge for yourself!

The dispute in this contract is over the costs we claimed in 2004 on a Cost Plus Fixed Fee (CPFF) contract to deliver sophisticated software research to the Air force Research Labs (AFRL), the end user. In 2004 we spent 1212.5 hours on the project which neither AFRL, nor the DOD oversight agencies (DCAA or DCMA) have ever questioned. The contract had a total value (ceiling or maximum) of $199,950, of which the government has (present tense) only paid $192,159.47. The rest of the due amount has been held by DCMA since 2005 until the final audit of the contract is completed. We’ll of course come back to that issue at a later point but, if you are with me so far, the bottom line is that in totality, the government has paid us $192,159.47 for the entire contract. Period. Not a penny more. OK, keep that in mind.

Now, let’s turn our attention to the Contracting Officer’s Final Decision that instigated our dispute. In his decision, ACO Studley claimed that we were overpaid by $91,992.77. For the moment, let’s suppose that all of ACO Studley’s financial assumptions to support his computations were correct. Even so, as you can clearly calculate for yourself, there is no other way for this math to add up except that the government wants almost 50% of what they paid us back. It is important to again note that none has ever questioned the number of hours we spent on this contract. I might also add that the results of our work was so exceptional that our Principal Investigator and AFRL staff co-authored a technical paper that was published in a prestigious peer-reviewed journal.

You should first convince yourself that there are no math tricks here. Next, try to think of any situation where a contractor delivers every contractual obligation (and then some) but is only entitled to slightly more than 50% of the monies the employer promised them. After that, you’ll immediately see why we consider DCMA abusive and, further, why we view FAR 1.602-2(b) to be a joke but, as promised earlier, I invited you to absolutely judge for yourself.

The Framework for Contractor Rights, FAR, and an Abusive DCMA

If you have sold anything to the private sector, you know how hard you’d laugh if you bid on a project, the customer notified you that you won but before signing a contract they asked that you turn over all of your accounting records, including how you arrived at your bid pricing. But wait, as the really bad late night commercials always harken to the unsuspected, there is more. Before signing the contract, the government will also have to approve your cost structure, how you organize your expenses, and agree with how much profit (fee) you may realize on the project. Excited? Of course you are. But, yes, you guessed it. There is still more. The government also reserves the right to question all costs on the contract years after delivery and ask for a refund. Overjoyed? Great. Sign here…

What Invisible Hand?

This approach to conducting business would of course beget nothing but laughter in the private sector. However, it is “business as usual” when it comes to dealing with the federal government. The reason this approach, at least theoretically, works is because of specific clauses in the Federal Acquisition Regulations that are supposed to protect contractors from intentional or accidental abuse. There are two key components within FAR that are to ensure this. They are

FAR 1.102(b)(3) which, as part of the Statement of Guiding Principles of the Federal Acquisition System, states that The Federal Acquisition System will Conduct business with integrity, fairness, and openness;

The next important FAR clause every government contract, particularly small business government contracts should know is:

FAR 1.602-2(b) that specifically states that “Ensure that contractors receive impartial, fair, and equitable treatment” as part of the Contracting Officers’ Responsibilities.

In our direct experience, every Procurement Contracting Officer we have dealt with did, in fact, adhere to these principles. However, in at least our particular case, we found that DCMA has intentionally set up a defective management infrastructure that promotes and rewards incompetence, particularly on the part of the ACOs and their supervisory staff. In doing so, the organization abuses small businesses but, overall, most likely, reduces the contract values by an appreciable percentage. That would be the only explanation to allow DCMA’s abusive behavior to continue unchecked. Again, I must emphasize that this in our direct experience, and again emphasize that we may be the only recipient of such abusive treatments as this reported in this blog.

Stand by and I will share our stories that show just how seriously the ACOs took these principles. At least in our case.

How Can Our Government Do This to Small Businesses?

One reaction I quite often get to the Quimba story is the expression of shock that the United States Government will abuse small businesses, particularly when their treatment is contrasted with that of large defense companies. I can’t really address that question but I can tell you that there is supposed to be checks and balances to ensure fair and equitable treatment of all contractors, and not just the small business. That responsibility is entrusted to the DCMA, in particular the ACO.

In my direct experience, however, most ACOs simply do not care enough about small businesses to do anything but try to get them off their “to do” list as fast as possible. Some, again in my personal and direct experience, even look upon small businesses as a nuisance and act as though the assignment to manage a small business contract is a punishment or, at the very least, significantly beneath them. In my direct experience, DCMA also intentionally fosters a defective management structure that promotes lackadaisical and inconsistent enforcement that breeds a contemptible lack of supervisory sophistication. Examples of my experience leading me to the above conclusion are having to contact the branch chief before Patricia Tillman, our one-time ACO responded to my repeated requests to help with an urgent matter. The requests were communicated via email, the phone, and even registered US Mail. Her lack of attention was a loud testimony that there is no concern on her part about any supervisory controls. When Craig Studley, our previous ACO issued a Contracting Officer’s Final Decision on the matter that started this dispute, and this blog, it was clear that no one inside DCMA reviewed his facts or checked them for accuracy.

In short, in my direct experience, DCMA has intentionally structured a management environment that promotes and rewards incompetence by its staff, particularly the ACOs. Over the next few postings I’ll examine various FAR clauses that are supposed to protect contractors but ACOs simply ignore them and raising the issue with DCMA supervisory staff yields absolutely no results.

For now though, my recommendation is to recognize that contractor-DCMA relationship is a zero sum relationship and, also that in my direct experience, DCMA staff intentionally victimize small businesses in order to reduce the final contract value, even attempting to renege on the direct rates you thought were definitively determined when the contract was negotiated.

People in this post:

Bob Dourandish – bob@quimba.com
Craig Studley – Craig.Studley@dcma.mil
Patricia Tillman – Patricia.Tillman@dcma.mil

Financing Government Contracts through Not Paying Contractors

As those of you who have read my posts know, we are going through the contract dispute process. The essence of our claim is that the government did not pay us which forced us to defer salaries until we got paid. And I need to stress that we eventually did get paid. As you’ll see if you continue to read this blog, the root issue is nothing more than an accounting hat trick that the DCMA is attempting to exploit to significantly reduce our contract value. If they win, the will have paid less than $15,000 for 18 months of research they received from our company. You don’t need to like us to see this to be wrong. In fact, you could even hate us with a passion and still easily recognize that there is almost no difference between our government’s actions and indentured servitude.

So how did we get here?

This problem started when we agreed to create a set of DCAA-approved indirect rates which includes review of contractor’s accounting books and practices. We needed DCAA’s conditional approval so that the Air Force would award the contract we had won. The theory was that we would work on the contract as well as revamping of our books. What we had not realized at that time was that unless we had a DCAA-approved indirect rates we would not be paid. The following is an email I received from Ms. Jean O’Donnell of DCAA on Tue 2/3/2004 at 4:38 PM

When you submit an invoice we will do a follow on audit of your accounting system.

You should have your indirect rates approved before the public voucher goes through our office but if you are anxious to get a payment we would generally process one public voucher before the indirect rates are approved so long as you submit the indirect rates for approval at the same time.

Jean O’Donnell, CPA

Supervisory Auditor

DCAA Peninsula Branch Office

So, basically, you get one payment, regardless of how long you’ve been working on the contract. Our contract was signed on 7/10/2003 – so by the time of the above email we had already been working on the contract for almost sever full months without pay.

I am not holding Ms. O’Donnell responsible for noticing that. Where I find DCAA (therefore government’s practices) not just unfair but downright exploitive toward small businesses is that there is NO SECTION in the Federal Acquisition Regulations (FAR) that prohibits the government from paying DIRECT rates while the small business is bringing its books to full DCAA compliance. It is of course important to stress that direct rates are negotiated by the Procurement Contracting Officer (PCO) BEFORE the contract is awarded. So, short of claiming fraud or lack of performance, the government is legally obligated to pay the direct rate for every hour the contractor actually works on the contract.

Clearly that fact was lost on Ms. O’Donnell and DCAA. Probably still is. An organization interested at all in fairness would have paid us the direct rate while we worked on addressing the issues. Particularly since they were getting value out of our effort and knew, for fact, that we were paying out of our own savings for our office rent, our CA Minimum Tax and other regulatory fees, and traveling cross country to meet with the Air Force Client.

At that time we were still naive and new this industry and, unfortunately, as babes-in-the-woods we assumed our government, representing the Ol’ Glory, will deal with contractors with fairness and honor. We further wrongly assumed that our government’s representatives are trained to uphold the moral and ethical code that defines, or at least SHOULD define America. It is truly saddening that, as we near the 2011 Fourth of July holiday, and nearly eight years after we signed that contract, I have to admit how absolutely wrong that assumption was.

People in this post:

Bob Dourandish, Quimba Software, bob@quimba.com

Jean O’Donnell, DCAA Peninsula Branch Office, Jean.ODonnell@dcaa.mil

How the Government Extorts Interest-Free Loans from Small Business Contractors

One of the ugliest truths about working as a government contractor in general is that the deck is stacked against you and in favor of the government. This is why large contractors invest heavily in lobbying efforts, maintain in-house attorneys and keep large outside law firms on retainer. The Procuring Contracting Officer’s “job” is in fact to get a best deal for the government that is possible, for each and every product or service the government buys. So they tend to generally be tough as nails when it comes to negotiating unit costs or direct rates when you are selected.

That part is not at all a problem and, in fact, as a taxpayer I not only understand that, I absolutely approve of it too.

The ugliness comes in when agencies such as DCAA and DCMA intentionally create structurally defective organizations to exploit contractors. I would in fact venture as far as to say that you are NEVER done negotiating terms and pricing on any contract until it is closed. Up until then you should absolutely expect the government, through its duly authorized employees in DCAA and DCMA to focus on reducing your contract’s value – or the total amount you will ultimately receive on your contract regardless of what they themselves agreed to, either explicitly or implicitly.

This is cheating.

Here are some of the issues we have directly experienced:

1. ALL payment withheld pending DCAA review of contractor books. This is perhaps the most egregious of all exploitive tactics used by the government to not only literally extort an interest-free loan but also force the company to agree to pretty much any term DCAA comes up with just so that their cashflow is restored. This can happen at any time during your relationship with the government, but is particularly practiced once a small business is awarded their first “cost type” (e.g., CPFF) contract, for example a Phase II SBIR.

2. Withholding your entire last invoice on a cost type contract.

3. Capping indirect rates.

4. All but forcing the small business into a cost sharing arrangement regardless of the company’s capability to support such arrangement.

My next few posts will delve into each item in more detail and examine the impact of DCAA and DCMA employees’ actions, regardless of intent. In particular I am going to dissect examples of specific actions taken by DCAA and DCMA employees, clearly sanctioned by their management and leadership – though not necessarily supported by a “written policy”, that hurt a small business by, at the very least, forcing the small business to in effect give an interest-free loan to the feds.