Robin wondered if this would be of interest. I said this issue seemed to be a common concern, and that people should at least be given the opportunity to learn about it. As you do, remember that this is just one set of procedures (obstacles?) the U.S. military and CPA has to deal with every day while trying to reconstruct Iraq. Special Report: Halliburton And Defense Contracting, Part 1/3 by Robin Burk Many questions have been raised about Halliburton's massive contract for services in Iraq. Is it a prime example of cronyism, or even corruption? How could we tell? The Defense Contract Audit agency recently reported that it has found no errors in bills submitted by Halliburton so far. Does that mean all is well? At a time when US taxpayers have been asked to dedicate $87 billion to efforts in Iraq and Afghanistan, questions like these have a high profile. And yet, for most people the U.S. defense contracting process is a mystery. The purpose of this special report is to give our readers a brief guided tour of the complex but important world of defense contracting. We'll look at the players and the process, the types of contracts that can be awarded, how the finances work and finally, what this all might mean for companies like Halliburton and Bechtel - and for you and me. As with everything I post here at Winds of Change, including my comments to the regular team's entries, what follows is my personal opinion only and does not reflect the opinion of the Army, the Defense Department or the U.S. Military Academy.
There is a veritable jungle of regulations, rules and practices in the government contracting world. Acquisition specialists who work for the federal government undergo extensive training and must traverse that jungle on foot each day. Companies wanting to do business with DOD or other federal agencies must also make their way through the undergrowth. Our tour will be easier - we'll be flying over this terrain, sometimes climbing high to see the lay of the land, sometimes coming in close to look at some particularly important details on the ground. Ready? Okay, let's go. Please ensure your seat belts are buckled and your tray tables are in their upright and locked positions, and give your attention to the flight attendant at the front of the cabin as the pilot prepares the plane for takeoff! Introduction Welcome aboard. We will be making this journey in three stages. In a few minutes we will be climbing up to get a high-altitude look at the people involved in defense contracting, the regulations that govern it and the process that is followed when the federal government buys things or services. Your tour guide will point out the main sights and and the key people involved in defense contracting. Then we'll land, refuel and answer any questions you might have. During stage 2 of our trip we'll drop down to a lower altitude so that you can have a chance to see the various kinds of contracts that can be awarded to companies. It looks as if we'll be having fine weather with good visibility, so you all will be able to get a good glimpse at how prices and profits are decided in defense contracts - and by whom. After that it will be time for another refueling break. On the final leg of our tour, we'll be over Halliburton country. If we're lucky, we'll get a glimpse of that fabled Iraq contract you all have heard about. Sometimes we can see Bechtels and even local subcontractors on that part of the trip, so keep your cameras out and your eyes peeled! Your tour guide has traveled in Defense Contractstan in several roles, mostly as a Bidder / Winner (and occasionally, a non-winner) of contracts but also on several occasions as part of the support team for the Government Side. One caution - the local rules in Contractstan change from time to time. But the main roads and the terrain are pretty well-defined. Relax and enjoy the trip! FAR Out It all starts with the Federal Acquisition Regulations and their offspring, the Defense FAR Supplements. The FAR/DFARS are the federal law that governs Department of Defense contracting. They spell out the process which Defense agencies must use to solicit bids, award contracts and manage the execution of those contracts by awardees. Also crucial to contracting is the defense budget passed by Congress. This starts with creation of the Presidential budget. Each executive branch agency submits detailed requests to the Presidential budget, and these in turn will be modified in dialogue with White House officials until the budget is finalized and sent as a request to the House of Representatives. Congress will then debate the requested budget and pass the spending authorizations which may, or may not, match the President's requests. Once passed, the defense spending authorization bill allows DOD to expend funds for various line items in the authorization. This means, for instance, that DOD cannot move money intended for troop salaries to pay for a weapons program, unless Congress explicitly approves. The Acquisition Process DOD and other federal agencies buy many things and hire companies to perform many services. Some of these, such as toilet paper, pens, and janitorial service, are purchased using a straightforward process. Office space might be rented and items such as toilet paper are purchased through the General Services Administration through a bidding process. The specifications of the required items are stated and generally the contract is awarded on the basis of price, although other considerations such as a willingness to warehouse the items might be important as well. A much more complicated process is necessary for professional services, the development of technologies and weapons systems and similar high-end efforts. These are items and services for which there is no "off the shelf" product or solution to hand. In these cases, the agency begins by developing an acquisition package. The acquisition package, which may grow to be hundreds or even thousands of pages long, documents the government's requirements for a new product or service. An analysis will usually be made of existing solutions and why they do not meet the current need. Detailed specifications will be drawn up, especially for technology solutions such as software programs, new weapons systems, etc. Cost analysts will attempt to estimate the price which the government will probably need to pay to acquire this system or service. One important part of the acquisition package is a list of the criteria (and their relative importance) which will be used to evaluate proposals and select the company who will win the contract to do this work. For instance, in the early stages of a new technology, technical creativity may be a top priority. In the development of a fighter aircraft that is to go into production for active deployment, other factors such as cost, ease of manufacturing and ease of maintenance and the management team's experience in building similar aircraft will be weighted more highly. Once the acquisition package has been completed, and assuming that the agency's line item budget appears to be adequate for the estimated cost, a Request for Proposals will be drawn up and advertised in the Commerce Business Daily. In addition, a Source Selection Authority and a Contracting Officer are named. (More on these below) The RFP states the detailed specifications for the product or service required, along with the information that bidders must provide in order to be considered for a potential contract. Generally, proposals have three main sections: the technical proposal (what the bidder proposes to do), the management proposal (how the bidder will organize and staff the management team that will run the contract if they win it, and why their previous experience makes it credible to think they can do this work successfully) and the cost proposal. We'll look at cost issues in Part 2 of this series. For now, we only need to note that companies or teams of companies spend a great deal of time and money responding to major RFPs, so most will only submit proposals when they think they are competitive. And, of course, the government agency has also spent a good deal of time and energy developing the acquisition package and drafting the RFP. Prior to the release of the RFP, and at every stage thereafter, government lawyers review the process to ensure that the RFP and the agency's actions conform to the DFARS and are being fairly executed. These lawyers report through a different chain of command than the program office that issues the RFP - both in theory and in practice they are independent of the Source Selection Authority and the Contracting Officer involved in this procurement. The Key Players on the Government Side The Source Selection Authority is a senior government executive or military officer who will make the final selection of the winner from among those who submitted proposals. The Contracting Officer is a career civilian who will actually execute the contract between the government and the winning company and will administer the contract while it is in effect. Each of these people are supported by a team of other government officials and often by a Systems Engineering and Technical Assistance contractor as well. For medium and large contracts, the SSA must convene an advisory Source Selection Board whose recommendation the SSA nearly always takes. This board may call on a SETA contractor to provide specialized technical or cost analysis during their deliberations, but the SETA has no decision role and also may not bid on this or similar contracts themselves. High profile companies that play a SETA role include the Federally Funded Research and Development Centers (FFRDCs) such as MITRE, Rand and Aerospace Corp. Written records are kept of the SSB's meetings and a written justification is filed by the SSA to support the choice of the company to receive the contract award. The Contracting Officer usually does not have direct technical expertise needed to evaluate the technical performance of a contractor him or herself. A Contracting Officer's Technical Representative (usually a military officer) is named to provide this expertise and to advise the CO as to the adequacy of the contractor's efforts once the contract has been awarded. The COTR is one member of the government's Program Office, the team that drew up the acquisition package and which will oversee the contract's execution. The Key Players on the Contractor Side The winning bidder will designate a senior executive as the Program Manager for the contract. The PM has both budget and technical authority over the activities that the company undertakes in performing on the contract. A program management office will be formed to track costs and schedules and submit required reports and invoices to the government. The FAR/DFARS are very detailed and specific regarding how this information must be determined and reported, so great care must be given to this activity. If a team of companies submitted the proposal jointly, one of them will be the prime contractor and will receive the contract from the government. The others will be subcontractors and contract with the prime to do specified portions of the work. The prime's Program Manager is then responsible for the performance of the entire team. For many defense contracts, prime contractors are required to subcontract a given percentage of the work to minority- or woman-owned small businesses. Pit Stop As this brief overview suggests, defense contracting is a complex process. Over the last 10-15 years, DOD has proposed and Congress has approved several mechanisms which allow the government to reduce the overhead of procuring high-end products and services while still ensuring that contracts are awarded fairly and executed properly. We'll take a look at some of these in the second part of this 3 part series. After we refuel and stretch our legs, we'll resume our tour with a more detailed look at the types of contracts that can be awarded. We'll also see just how - and by whom - pricing and profits are established in Defense Contractstan.