Eye on Policy

“What the blankety-blank are we doing?”

That’s a typical (and real) reaction of contractors and federal procurement camp followers when it comes to the April 30th executive order about contracting. The move takes the longstanding preference for fixed price contracts into new territory. Two elements of particular note:

• Contracting officers have less discretion because contracts over a certain dollar level that are not fixed-price require an agency head’s signature. The order pegs the threshold at $100 million in the Defense Department, but only $10 million for most other agencies (with higher limits for NASA and the Homeland Security Department). Agency heads may delegate this authority, but only to political appointees.
• Contractors with non-fixed price deals worth more than $10 million can expect agency reviews, required under the order, and conversion to fixed price if possible.

There’s an added twist, and something of a head-scratcher. The EO also instructs agencies to emphasize either fixed price as defined under the Federal Acquisition Regulation Part 16, or contracts that tie profit to performance-based metrics when appropriate (emphasis mine).

By slipping in the idea of performance in the context of fixed-price, the EO clouds the outlook for services contracts, especially hybrid-type contracts that might include share-in-savings or metrics-based incentives.

In theory, contractors can make more profit if they cut their own costs. In practice, that’s proven risky. For instance:

• Accounting and reporting rules mean the government can sometimes demand price reductions if a contractor substitutes lower-cost labor or if promised individuals go to jury or reserve military duty. Especially watch out on cost-plus-fixed-fee contracts under FAR 16.306 and cost-plus contracts subject to conversion under the EO.
• Fixed-price awards can leave contractors in a bind if costs balloon out of control. Just think of the recent record of supply chain uncertainty and now, spikes in energy costs.
• The government has a poor record on the other side of the “fixed” equation, namely fixed requirements. Will the government be loose on small alterations, which add up from a cost standpoint, but rigid on pay?

A company can always bid high to factor in contract risk. That creates a competitive disadvantage. Bidding low and hoping for performance incentive payments will often constitute wishful thinking; and worse if you get stuck with a price reduction order.

The Office of Management and Budget is supposed to issue guidance by the middle of June, but in the meantime contractors and agencies alike are puzzled trying to figure out the implications. In the meantime, as noted, the mandate for agencies to review all their contracts worth more than $10 million makes for a huge administrative burden on the government itself.

My suggestion for a great test case for a firm, fixed-price contract: The Ballroom.

New frontier in anti-fraud

A Minnesota woman received a 42-year prison sentence last week for her part in a $250 million fraud scheme siphoned money from COVID relief funds to phony organizations.

A couple of months earlier, Vice President J.D. Vance presided over launch of the government’s anti-fraud program, led by Federal Trade Commission Chairman Andrew Ferguson. Somewhat oddly, Ferguson brought news of a new Justice Department division devoted to countering fraud.

Vance noted $22 billion in Small Business Administration loans the Trump administration would be going after. It put a six-month hold on new Medicare provider applications for hospice and other health care services companies. He noted $135 billion in COVID-era claims from when the government showered printed money on the economy, all with scant oversight or verification mechanisms.

Unfortunately, the administration, as is its tendency, has tied its fraud campaign to party politics, with the administration blaming its predecessors for laxity. That doesn’t take away the importance of reducing fraud, not only for the money but also for maintaining the general credibility of the government itself.

By having state attorneys general attend, Vance underscored the importance of federal-state cooperation in improving fraud detention efforts for the trillions in yearly federal entitlements spending that flow through state agencies.

Not a new problem, but an opportunity for the government and contractors alike to take on a problem exemplified by the near complete failure in the ongoing Minnesota scandal. Like cybersecurity, fraud prevention lacks glamour in that the rewards come from what didn’t happen.

Several federal agencies see fraud detection improvement as part of modernization. In a purely federal example, the Transportation Department has been working to prevent fraud in the issuance of interstate truck drivers’ licenses and in safety-related reporting of activity.

The deputy chief technology officer, Arkur Saini, has said this effort by the Federal Motor Carrier Safety Administration ranks in priority as high as air traffic control modernization. It consists of a variety of efforts to rationalize numerous subsystems, use data more effectively, and, of course, bring in artificial intelligence.

As the government has grown more digital, so too have the means of stealing from the public. The emergence of new AI capabilities has opened new opportunities for effective approaches to stop it.