The Absurdity of Government Contracting
I take no joy in writing this article, but it is a desperate plea for improvement.
From 1995-2001, I worked for the Department of the Army as a contract specialist procuring advanced communications and electronics systems, equipment and services.
The first contract I ever negotiated was valued at over $3 million opposite an emerging company from Massachusetts. I had just finished my four-week Contracts 101 training in Virginia, and I was eager to put my newfound knowledge of the Federal Acquisition Regulation (FAR), Defense Federal Acquisition Regulation Supplement (DFARS), and Army Federal Acquisition Regulation Supplement (AFARS) to work on behalf of the Army and the American taxpayer. Then reality set in. Despite being armed with this new knowledge and skill, I was hamstrung by a procurement system so vast, complex and rigid it would make Kafka blush.
Throughout the course of my next seven years with the Army, we were promised acquisition reform, enhanced efficiencies, paperless transactions and less red tape, particularly in connection with the procurement of commercial items and services.
Since leaving the Army, I have focused my practice primarily on commercial contracts in a variety of industries, ranging from media and entertainment to digital advertising and technology. Increasingly, however, I have been handling more government contracting issues for our clients, including negotiating contracts for prime and subcontractors and handling diligence and regulatory issues in connection with mergers and acquisitions. It never ceases to amaze and disappoint me how different these commercial contracts are to federal contracts. The commercial process is still so much faster and efficient; the contracts are generally much shorter and less complex; and the parties are able to navigate contentious issues through negotiations rather than having to abide by a panoply of opaque and largely wasteful regulations.
To illustrate, a client of ours provides its customers access to its hosted marketing platform via a standard nine-page contract. The company has been offering this product on a Software-as-a-Service (SaaS) basis for years to its commercial customers. It typically negotiates all of its contracts using its in-house counsel. It has—due to the onerous and largely unnecessarily complex requirements and restrictions of becoming a government contractor—refused to do direct deals with the federal government. Instead, it uses resellers to do business indirectly with the government.
In its most recent acquisition, the prime contractor had a massive marketing and advertising deal worth hundreds of millions of dollars with the Army. The prime contractor engaged a subcontractor to provide certain products and services. And this subcontractor, in turn, engaged our client to provide its SaaS offering. Our client was slated to make approximately $1 million dollars a year on this transaction, which for the company was meaningful, but certainly not its largest contract.
Aside from the fact that this transaction required no fewer than three separate contracts—the Army with the prime, the prime with the subcontractor and the subcontractor with our client—the Army certainly paid more than if it had procured the SaaS offering directly from our client. Additionally, each of the other parties had to draft and negotiate its contract with its respective counterparties.
Although this cumbersome process would be true in many transactions involving multiple tiers of contractors, the problems were greatly exacerbated by the inefficiencies inherent in the government contracting process. First, there are simply too many regulations. The series of transactions, which were for the ultimate benefit of the Army, involved literally hundreds of contract clauses incorporated either in full or by reference from the FAR, DFARS, AFARS and local procurement regulations.
Second, many of the over 50 FAR and DFARS clauses that were slated to “flow down” to our client (i.e., clauses that were included in the prime contract that flowed down to the subcontractor that flowed down to our client) were simply inapplicable. Our client is a small business and the transaction was a fixed-price, commercial item contract under FAR Part 12. Notwithstanding, the contract included a host of clauses not applicable to commercial items or small businesses. Of the remaining clauses that were required, by regulation, to be included in our contract, most should not be required in these types of contracts.
For example, although it is a laudable goal for all companies to create, maintain and enforce a robust anti-kickback policy, is it really necessary to impose such a requirement on a small business providing a SaaS offering? The FAR says it is.
Third, and interrelated, our client had no interaction, or opportunity to interact, with the government contracting officer. So, when we rightfully objected to many of the over 50 ridiculous government contract clauses being imposed on us, all questions/requests/communications had to be with the subcontractor, which then routed them to the prime contractor, which then routed them to the contracting officer, who offered the perfunctory, “It’s required by the FAR.” Again, keep in mind that our transaction was for a commercial item that our client had been licensing to nongovernment customers for years using a subscription agreement of only nine pages. FAR Part 12 was drafted specifically to resolve this madness.
By the time our negotiations were over, it had taken our client several weeks, thousands of dollars in outside legal fees and extensive internal resources to finalize a deal of over 50 pages that should have taken an afternoon with no out-of-pocket expenditures. Moreover, our client, in an effort to close the deal, ultimately agreed to provisions it would never agree to in a typical commercial agreement. Despite the lucrative contract, the inefficient process reaffirmed and cemented our client’s decision not to do business directly with the federal government.
In an era where the Chinese, Russian, and other foreign governments simply take technology from their domestic companies, doing business with the U.S. federal government is comparatively benign. Nonetheless, as evidenced by the recent $4.8 trillion budget for fiscal year 2021 with massive increases in spending for artificial intelligence, quantum computing and military research and development, government procurements involving cutting-edge technology are critical to the safety, security, and well-being of our country.
There is simply no excuse for our antiquated, byzantine procurement process. How much of that $4.8 trillion dollars is wasted through inefficient procurement processes and procedures? How many wonderful companies refuse to do business with our government because of that? What technologies will the government never have access to because of this administrative morass? These are deficiencies that the government was promising to resolve back in 1995 when I first started as a civil servant, and they have not gotten any better. How long must we wait?
It is high time that the government do a comprehensive review of our procurement system from top to bottom and not only reduce or eliminate many of the myriad statutes, regulations, rules and policies, but also simplify the entire acquisition process to incentivize all companies to do business with our government.
Matt Savare is a partner at Lowenstein Sandler, counseling clients on a range of matters involving government contracting, intellectual property, media, and entertainment issues. He previously worked as a contract specialist for the Department of the Army.
Comment
I concur with the author
I concur with the author regarding the current procurement regulation environment. What strikes me as the most bizarre aspect of government procurement is how little the Contract Specialists seem to meet with industry. I understand why: One wrong slip-up, and they can run afoul of one or more FAR clauses, and could get penalized either criminally or civilly in the process. But if they only interact with industry through releasing document-heavy RFPs and RFIs, how do they know they are getting a good deal? I know if I was spending $1 million plus, I would like to meet with a vendor representative in person, but perhaps I'm old fashioned, haha. At a minimum, more Contract Specialists should follow-up on RFI responses by inviting the respondents for in-person capabilities briefings.
The article makes valid
The article makes valid points, however, many of the acquisition clauses are mandated due to laws and regulations that had to be put in place because of some incident where people did not do the right thing in terms of ethical conduct and/or pride in their work product. Having been in industry, the military, the civil service, and academia for many years as well as having been a certified acquisition professional,my experience tells me that this problem can only be solved by fixing the laws for government contracting and by also realizing that it is impossible to write or manage a contract unless you are a subject matter expert in the goods or services you are contracting to obtain. People will fire back at me that if you are a contracting officer, you can contract for anything because you use your government subject matter experts. This is a corollary to the "if you are a good manager you can manage anything" myth. If people get real in their thinking, they should come to the conclusion that you cannot contract for or manage a good or service that you know little about. When you have complex good or service, you will have a multidisciplinary team develop the contract package and then help monitor it once awarded. However, every member of the team will still need a solid education in contracting, a good level of experience in acquisition, and a decent level of subject matter expertise about the good or service being contracted. The commercial world does not do everything perfectly either. Large corporations can be just as bureaucratic and convoluted as the government. The real fix is to transition our society to one of well rounded renaissance professionals who are multidisciplinary instead of sticking with our outmoded industrial age mentality of over specialization. Until you fix the mentality of society and make a team members savvy in both contracting and in technical subjects specific to the goods or services that are being contracted to obtain, then expect bureaucracy to get worse as the FAR and DFARS are made even more complex in an effort to fix poorly written contracts that got that way because writing and managing a good contract requires enormous expertise and hard work. You cannot manage what you do not understand is the bottom line. If you have renaissance professionals, they can fix the regulations and make well reasoned and persuasive recommendations for our law makers to fix the laws that are at the root cause of the unnecessary complexity and failure.
But you can't legislate
But you can't legislate morality, or ethics, and that is what we have tried to do over the years. I would cost far less to deal with the occasional miscreant than to drag everyone through the many small compliance knotholes we have created.
It is interesting to note the
It is interesting to note the geometric increase in contract dollars being applied to OTA ("Other Transactions) for purchasing of items like those highlighted by you in your closing paragraphs. While an OTA would not have been an appropriate vehicle for the purchase of your client's product, it is a methodology being more widely used to bypass those FARs and DFARs and the byzantine contract negotiation process for emerging technology.
Coming from both a Government
Coming from both a Government Contract Compliance and Defense Contracting background (I work two full time jobs at a DCAA compliant accounting firm and an aerospace engineering company), I have seen both sides of the issue, and cannot agree more that government contracts and procurement often needlessly complicate contracts for small business.
Now of course, there is a reason why, on cost type contracts, or those FFP or T&M contracts, that the government makes small businesses jump through endless hoops related to their accounting, timekeeping, compensation levels, allowable profit margins, and a whole host of other issues: they are the best and largest customer on planet earth, and they want to make sure they are not getting ripped off--but they are willing to pay their fair share of a company's indirect / overhead costs in many contracts. This is a huge benefit to small businesses, and the US Government, and contracting vehicles like the SBIR/STTR program can be terrific sources of non-dilutive funding for start-ups.
However, on the flip side, I also get at least 1-2 calls each month from a small business that received a small contract from the government, or subcontract from a prime (something to the tune of ~$25,000 - $250,000), and yet somehow, someone has decided to flow down FAR clauses that mandate the company setup and maintain a DCAA compliant accounting system (which costs most companies a bare minimum of $25,000 - $30,000/year to maintain). It is ludacris. And, in many of these situations, the contractor can negotiate with the government or prime to simply remove that requirement as it is completely unnecessary and in many cases, not financially viable for a small business. But, for every one of those, there is another that will be forced to comply with these requirements.
Should you find your business needing to install and maintain a DCAA compliant job cost accounting system for a contract with the DoD, NASA, DHS, or DoE, you are going to likely have to bite the bullet, and get the ball rolling. There are affordable options based on the QuickBooks platform, which are ideal for companies that generate $1M - $20M annually, and our firm (in the link below), is one of the largest and well known DCAA compliant accounting firms in the country.
Feel free to reach out to us or drop a comment here to learn more about FAR & DCAA compliance, and how we can help contractors with other confusing procurement issues including invoicing WAWF, establishing indirect rates, and helping generate budgets and pricing proposals for contractors.
Great blog, Mr. Savare, and thank you to AFCEA.org!
I'm a little late to the
I'm a little late to the party but came across this article and wholeheartedly agree. I'd expand the need for complete revamp from just the contracts themselves though, to the whole acquisition process.
I've worked for many years for Federal contracting firms selling mostly services. The incredible costs we put into bids is staggering. And this increases our costs to the customer!
Here are some important issues we MUST address in future:
- There is no "tiered" method to ensure the bidders' costs are commensurate with the contract value. Small ones often have similar standard requirements/clauses and therefore cost as much to create as medium or large ones. (There is supposed to be a "simplified acquisition" process - would like to take that and put it on steriods!)
- There is no truly open and accurate information provided to all bidders to even the field on bids coming out, even when they are know at least 6 months in advance. RFIs help but most often (~75% time?) lead to no actual RFP. RFP drafts do help, with Q&A. Vendors conferences help most.
- Often, after thousands of hours of investment and a nice award (we thought), the award is overturned, or more often canceled, by a protest.
- Better yet, we've put in HUGE bids only to have them canceled (not by protest), or, NEVER AWARDED. I mean, not even a word back that it's cancelled, or anything at all.
- There are huge advantages to being a small business. Great, I support that. Then the giants of course have the resources to always do well. There is no recognition/advantage to being in between. This puts in no-mans-land and often completely out of a business a whole lot of great small-ish companies with fantastic teams. We need some protections/advantages for those middle tiers to survive.
Not a sermon, just some thoughts. (But important ones!!!!)
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