Current Issues in Subcontract Management and Compliance

1. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

2. Current Issues in Subcontract Management and Compliance

3. We’re drowning in information and starving for knowledge. -Rutherford D. Rodgers NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

4. Seminar Topics The Relationship Flow downs Source Selection Price Analysis Subcontracting Process and File Documentation Requirements NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

5. Defining Risk Contractor operations expose Government to risk • Financial • Quality • Delivery NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

6. Contractual Relationships Subcontract/PO establishes relationship between prime and subcontractor Protects the rights of primes and the Government NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

7. Contractual Relationships NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

8. Contractual Relationships Subcontract Management tools used in Risk Management: • Advance Notification • Consent to Subcontract • Debarment Process • Small Business Subcontracting Programs NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

9. Risk Management Tools Sarbanes-Oxley Act Make or Buy Program (FAR Part 15) Competition in Subcontracting (FAR 52.244-5) NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

10. Risk Management Tools Prime Contract • Terms and Conditions • Statement of Work Subcontract Process • RFP • SOW • Selection of Subcontract Type • Flow downs Flow-down Clauses • Truth in Negotiations (FAR Part 15) • Cost Accounting Standards (FAR Appendix A) • Right to Audit Clause (FAR 52.215-2) NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

11. Risk Management Tools Proposal Analyses (FAR Part 15) Subcontracting for Commercial Items (FAR 52.244-6) Contractor Purchasing System Review (CPSR) (FAR Part 44) NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

12. CPSR – The Customer’s Review Measures How Efficiently and Effectively a Contractor Spends Government funds and; Evaluates Compliance With Government Subcontracting Policies, Regulations, and Laws. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

13. CPSR – The Customer’s Review Subcontractor’s Government business volume exceeds $25 million (excluding competitive FFP, competitive FFP/EPA contracts/subcontracts, and commercial item acquisitions) Whenever an Administrative Contracting Officer or Procuring Contracting Officer specifies NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

14. CPSR Risk Assessment: Basis for Selection • CPSR Approval History • Identified by PCO or ACO • Increased Sales to Government • Growth • Pre-Award Surveys • Major Programs/High Visibility • Other Audits • Self Assessment Activities NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

15. CPSR: Identification of Risk Factors Signs of a Weak Purchasing System Identified During Self Assessments: • Inadequate Procurement Lead Time • Violation of Public Laws • No or Poorly Written or Implemented Policies • No or Weak File Documentation • Lack of Upper Management Commitment to Compliance with Procurement Regulations NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

16. Opportunities for Success or Failure 98% of firms will not pass their initial CPSR! NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

17. Source Selection Implications Past Performance Implications Losing A Competitive Proposal Loss of Revenue Negative Impact on Competitive Acquisitions Impact of an Unsuccessful CPSR on Contractors:Losing The Competitive Marketing Advantage! NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

18. Defense Contract Audit Agency or Inspector General’s (and Other Audit Agencies) Alerted Other Audits Will Follow Possible Negative Press Government Oversight Implications Impact of an Unsuccessful CPSR on Contractors:Long-Term External Compliance Oversight Impact NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

19. Increase Administrative Contracting Officer Surveillance Delay in Placing Orders Increase Administrative Expenses Delayed Billings & Collections ACO will not waive ACO Consent to Subcontract Impact of an Unsuccessful CPSR on Contractors:Procedural Burdens with Project Management Impact NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

20. Implement Corrective Actions Change Processes Change Culture Implement Training Program Prepare for Follow-Up Audit Corrective Action Plan with Specific Tasks, Milestones, and Preparation for a Follow- Up Review Impact of an Unsuccessful CPSR on Contractors:Costly Internal Compliance Impact NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

21. Source Selection Documentation NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

22. The Source Selection “T” NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

23. Single/Sole Source Justification Required in accordance with: FAR 52.244-5 “The Contractor shall select subcontractors (including suppliers) on a competitive basis to the maximum practical extent consistent with the objectives and requirements of the contract.” Must be signed and dated by requestor prior to award NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

24. Single/Sole Source Justification Typical conditions where by single and sole source buys are justified include: • Only One Responsible Source • Unusual and Compelling Urgency • Industrial Mobilization (R&D, etc.) • Customer Directed • National Security • Public Interest • Management Directed • Economically Justified (Cost to qualify new source outweigh savings) • Follow-on Procurement NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

25. Team Sourcing Documentation Document the Team Source Selection Decision Focus on Team Competitiveness Document Sole Source Team Members FAR NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

26. Overview of Price Analysis NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

27. Why Perform Proposal Analyses? Contracting Officers (buyer) shall purchase supplies and services from responsible sources atfair and reasonable prices (FAR 15.403). Proposal analyses tools assist in the determination of the fair and reasonableness of costs and prices. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

28. Contractor Guidance FAR 15.404-3 (b) States: The prime contractor or subcontractor shall— (1) Conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontracts. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

29. What is Reasonable? A cost is reasonable if, in its nature and amount, it does not exceed the cost which would be incurred by a prudent person in the conduct of competitive business. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

30. Price Analysis – Comparison Process Select Price for Comparison • Prices for Comparison • Other Proposed Prices • Commercial Prices • Previously-Proposed Prices, Subcontract Prices • Parametric Estimates • Independent Estimates Identify Factors That Effect Comparability Determine Effect of Identified Factors • Quantitative Techniques to Adjust Prices • Index numbers • Trend Analysis • Price-Volume Analysis • Graphic Analysis • Learning Curve Adjust Prices for Comparison Compare Offered Prices With Adjusted Prices NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

31. Negotiations Per FAR 15.405 - Unfair Price? Negotiate!! • Price negotiation is intended to permit the contracting officer (buyer) and the offeror to agree on a fair and reasonable price. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

32. Ineffective Negotiations NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

33. Pro-Active Compliance NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

34. Procurement Process Timeline PO/SubK PR Source Justification RFP/RFQ/RFI Proposal /Quote Price Analysis & Tech Evaluation Negotiations ACO/PCO Consent Debarment Verification Certifications NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

35. Key to Embracing Compliance Communication Purchasing/Subcontract Admin Contracts Program Management Engineering Compliance Community Government/Clients Self Governance NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

36. Contract Management’s Role The Role of Contract Management is Critical: • Contracts must work with CO’s to pro-actively remove restrictive, unnecessary, or out-of-date clauses from RFP’s and contracts NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

37. Path Forward • Educate Process Owners in terms of how certain clauses impact the program: • Cost Accounting Standards • Cost and Pricing Data - only when required • Consent/Advanced Notification - only when required • Organizational Conflict of Interests • If a clause is not required, ask that it be eliminated! NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

38. Jeffery A. White, C.P.M., President J.A. White & Associates, Inc. 1341 Garner Lane, Suite 104 Columbia, SC 29210 803.407.1399 ext. 101 803.407.0256 (fax) jawhite@jawhite.com www.jawhite.com Jeff Rankin, Vice President, Business Development J.A. White & Associates, Inc. 5335 Wisconsin Ave. N.W. Suite 440 Washington, DC 20015 202-243-0575 (office) 202-531-3179 (cell) jrrankin@jawhite.com www.jawhite.com For Additional Information NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management