DOD To Impose Controls On Labor And Overhead Rates For Services Contracts

On July 31, 2012, the DOD issued Class Deviation 2012-O0012, Limitation on Amounts Available for Contracted Services.  This was a step to implement language contained in Section 808 of the 2012 National Defense Authorization Act (NDAA):

“(1) establish a negotiation objective that labor rates and

overhead rates in any contract or task order for contract services

with an estimated value in excess of $10,000,000 awarded

to a contractor in fiscal year 2012 or 2013 shall not exceed

labor rates and overhead rates paid to the contractor for contract

services in fiscal year 2010”

The Professional Services Council (PSC) challenged the implementation of this provision on September 18, 2012 with a letter to the Undersecretary of Defense pointing out that the DOD implementation guidance did not allow for exceptions for certain contract types, recognize the conflict with labor related laws such as the Service Contract Act, and the Davis Bacon Act, or recognize the impact on overhead rates prompted by provisions of the recently passed Pension Protection Act.  Essentially, the DOD implementation was a mimic of the language in the NDAA only, with a tone that suggested that the constraints on rates were absolute caps rather than factors to be considered in setting negotiation objectives. Although challenged by the PSC, the class deviation was not changed.

This guidance will no doubt get sorted out by the DOD in future clarifications with something that is actually workable, but what’s the bigger issue here?

Budget control should be at the requirements level not the “rates” level.  To try to control budgeted amounts by each component of cost is ludicrous.  Rather, the Congress and the Executive Agencies should look at the need for services (functions/tasks, quantities, levels of service) to impose budget control, and leave the cost components to the discretion of the Contracting Officer charged with the analysis of the many variables and established systems (CAS, Cost Principles) that go into setting final cost objectives.

This Congressional guidance imposes yet another burden on the Contracting Officer, dilutes the Contracting Officers’ discretionary powers, constrains the application of any rational business acumen, and likely will create impossible negotiation positions.   Above $10 million, the CO has to seek “permission” from a higher authority (in some cases the Deputy Secretary?) to exercise her/his authority to execute a transaction that is otherwise sound but may exceed these artificial constraints.  We’ve spent a lot of capital over the last decade strengthening the integrity of the acquisition system by developing a competent, experienced, and well-trained, professional workforce, increasing the reliance on the accountability and judgment of the Contracting Officer.  This type of legislation seems to fly in the face of those efforts.

Finally, the FAR principles (FAR 1.102) are compromised by this type of Congressional and Agency guidance.  It is hard to fathom how the government can “conduct business with integrity, fairness, and openness” while imposing constraints that are artificial and arbitrary; or how inserting additional burdens and process steps in arms length negotiations can “minimize administrative operating costs…to ensure maximum efficiency.

The threat of sequestration and the economic climate in general will continue to impose challenges to controlling costs and reining in budgets.  It would be prudent, however, to stick to our principles in meeting these challenges.

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