REMARKS ON THE FAR 15 REWRITE, PHASE I

REMARKS ON THE FAR 15 REWRITE, PHASE I

FAR COUNCIL PUBLIC MEETING

NOVEMBER 8, 1996

I. INTRODUCTION

Members of the FAR Council, FAR 15 Rewrite Phase I Team, Ladies and Gentlemen. Good morning. I am Jim McAleese of McAleese & Associates, P.C., located in McLean, Virginia. We represent both commercial and non-commercial government contractors, including developers, production houses, systems integrators, service providers, prime contractors, subcontractors, and both large and small contractors.

Thank you for the opportunity to share my thoughts regarding Phase I of the FAR 15 Rewrite. I strongly support many of the changes proposed in Phase I, primarily because the reforms will accelerate the acquisition process by reducing cycle times from new mission requirements to initial operational capability on major weapons and hardware programs. In doing so, they will achieve significant savings for both DoD and other Federal agencies, which savings can then be re-invested into other government programs. This is in addition to generating savings by reducing the government's internal acquisition costs. Various provisions of the proposed changes will also provide contractors greater flexibility in creatively offering true "best value" solutions to the customer. In short, the reforms will promote more efficient use of scarce acquisition dollars. This means that the government can then buy more goods and services, and spend less on the administrative and bureaucratic costs of procurement.

However, acquisition reform may not necessarily generate large savings in the short term, because contractors may expend more proposal preparation costs (B&P) to craft the type of "First and Final Offers" (FAFOs) required to win under the new regulations. This is driven by both market share and contractor perceptions. Nevertheless, acquisition reform will certainly save money in the long run and yield greater contractor profit, so long as both the government and contractors clearly understand the new process.

Still, some proposed changes raise serious concerns for government contractors. Accordingly, I will focus my remarks on two types of reforms: those that many contractors strongly endorse, and those that cause contractors significant alarm. For convenience, I have organized my remarks under four clusters of issues, and will address them in the following sequence:

The Newly "Constricted" Competitive Range;
Obsolescence of BAFOs and the Dynamic Emergence of "FAFOs";
"Technical Leveling" and "Auctioning"; and
Past Performance Evaluations

II. THE NEWLY "CONSTRICTED" COMPETITIVE RANGE

(a) Under the current rule, FAR 15.609, the Contracting Officer is obligated to include in the competitive range all offerors with a "reasonable chance of being selected for award." Consequently, almost all offerors routinely expect "meaningful" discussions and submission of Best and Final Offers (BAFOs). The FAR advises the inclusion, rather than the exclusion, of offerors into the competitive range: that is, "if in doubt," admit them into the competitive range. Under that incremental process, offerors often submit initial proposals with intentional ambiguities in key technical and/or business details. The reasonable expectation is for an offeror then to tender its genuine offer as the BAFO, often to prevent the perceived danger of "technical leveling" and "auction techniques" in high-priority programs. This incremental strategy also keeps the successful offeror's pricing options open, and generally ensures that not too much money is "left on the table" between the price of the awardee and that of the next-ranked offeror.

(b) The proposed rule, in contrast, gives the Contracting Officer new authority to "constrict" the competitive range to an "efficient number" following the evaluation of initial proposals. This represents a fundamental change to traditional negotiated procurements. In short, the government has shifted the competitive range dynamic from "when in doubt, keep them in," to "when in doubt, throw them out." Moreover, as long as the government states its intention in the solicitation, the Contracting Officer may even identify the number of offerors that he or she intends to admit into the competitive range. This places an obvious premium on being rated most highly in technical approach and other evaluation criteria, such as "past performance," on initial proposals. In effect, this dramatic change creates the equivalent of award on FAFOs. Consequently, contractors who do not prepare their initial proposals on "bet the company" programs as "FAFOs" may not survive in the marketplace for lack of new business capture.

(c) Recommendation: Although the proposed constriction of the competitive range disrupts contractors' existing business strategies, it is my impression that contractors generally endorse the concept of being notified as early in the process as possible that they are unlikely to receive award. Contractors are understandably frustrated by the current process that keeps their companies in a procurement, at considerable expense and the loss of other business opportunities, only to learn later that they did not ever have the probability of receiving the contract award. This frustration results primarily because of the policy in the FAR that admits all proposals with a reasonable chance of being "made acceptable" into the competitive range, i.e., it encourages the inclusion of marginal initial proposals, rather than their exclusion.

Ironically, there is no statutory requirement for this FAR policy. It appears as if the only interests served are the government's aversion to risk and industry's perception of "fairness." However, this is not truly a "fair" management of competitive procurements, because every cent spent by contractors must be invested in activities that have a realistic potential of returning both investment and profit. It is not in the government's long-term interests either, when it is forced to expend scarce overhead dollars to conduct discussions with offerors who do not have the probability of receiving award. Consequently, many contractors already support the notion that only those initial proposals with the "greatest likelihood of award" should be admitted into the competitive range.

We also note that the proposed rule potentially creates a two-step process. The first step requires an evaluation to determine those initial proposals with the "greatest likelihood of award." Once those initial proposals are identified, the second step allows further constriction of the competitive range to limit the number of offerors to achieve "efficient competition." The rationale is that this secondary constriction enables the government to more effectively negotiate with the remaining offerors.

The community appears to be divided on this issue. One segment of the community argues that, once those initial proposals with the "greatest likelihood of award" are selected, then "efficient" competition has been achieved as envisioned by FARA. Therefore, there is no need for the second constriction of the competitive range. On the other hand, some "captains of industry" who believe that the second constriction is needed to truly change the "cultural" problem created by the FAR, which promotes inclusion of too many offers into the competitive range. Such proponents argue that for negotiated procurements to become more efficient, this second stage is needed to refine fully the competitive range to the "best of the best." With either option, I recommend strongly that the government be given additional discretion to constrict the competitive range, and that the exercise of that discretion be reviewed on a periodic basis to prevent concerns over potential abuse.

Finally, I would be remiss if I failed to mention the recent discussions occurring in the public and private sectors concerning whether you intend to limit the number of offerors prior to the establishment of the competitive range. In my discussions within the community, it appears that limiting the specific number of offerors prior to the establishment of the competitive range was not your original intent. I have taken the opportunity to review the language in question, FAR 15.406 and FAR 52.215-1, and I understand the potential for misinterpretation, particularly if a person had not read the preceding provision on evaluations. This ambiguity can be avoided easily in a number of ways. First, you could delete any reference to limiting the competitive range in the solicitation. Second, you could rewrite FAR 52.215-1 to make it clear that the government solicits all vendors interested in the acquisition to submit an offer. However, after completing the first evaluation of all initial proposals submitted and taking into account its market research and conditions, the government may limit the competitive range for efficiency purposes to a number that provides the government the opportunity to have "discussions" with those offerors who have the greatest likelihood of receiving award. Third, you could incorporate the "estimate concept" found at FAR 15.406 into FAR 52.215-1. However, any reference to a specific number of offerors to be unilaterally admitted into the constricted competitive range (i.e., "estimate," "anticipate") in the solicitation clause may contribute to anxiety within the contractor community. Moreover, it will limit, rather than broaden, the discretion delegated to the Source Selection Authority. I recommend the second alternative, since it provides offerors information that allows them to decide whether to compete for a contract, knowing the government's view of the marketplace and its need to limit the competitive range for "efficient" competition.

III. OBSOLESCENCE OF BAFOS AND THE EMERGENCE OF "FAFOS"

(a) Under the current paradigm, all proposals with a "reasonable chance of award" are generally admitted into the competitive range under the "full and open competition" mandate of the Competition in Contracting Act of 1984 (CICA). Consequently, contractors have historically declined to tender their best offers in their initial proposals. Instead, they waited until submission of BAFOs after the completion of discussions, when they had sufficient opportunity to identify the government's true "technical discriminators" and price sensitivity. Only then would contractors tender their genuine offers, often cutting their proposed price by as much as an additional 15% to further improve their chance of award. Under that paradigm, contractors generally spent 85% of the program's budgeted B&P; through submission of the initial proposal, and then would spend the remaining 15% refining the proposal in accordance with what they had gleaned from discussions.

(b) Under the proposed rule, however, BAFOs will become increasingly obsolete because Contracting Officers will have the discretion to selectively conduct "communications" with offerors, prior to establishing the constricted competitive range. This is in contrast to conducting "discussions" following the formation of the competitive range. I am deeply concerned that these proposed changes pose increased risks to contractors and potentially adverse consequences to "full and open competition."

For example, the proposed regulation states that pre-competitive range communications "are conducted to obtain information that explains or resolves ambiguities or other concerns." Pre-competitive range communications of this nature may well create the "perception" of unfettered latitude to the agency to assist preferred vendors in making award on their initial proposals, while ignoring less favored contractors. The fundamental problem with the use of these communications is that they could potentially foster the appearance of inequality among offerors, and could violate the continuing statutory obligation for "full and open competition."

(c) Recommendation: Concerns remain as to the potential appearance that the proposed regulations could not permit offerors to orally modify their initial proposals during "communications." Under that scenario, a Contracting Officer might be persuaded to (1) orally agree to modify an offeror's proposal, (2) then make award without discussions, and (3) subsequently modify the contract after award. The problem is that this would foster suspicion that other offerors in the competition did not receive the same opportunity to revise their initial proposals to match the awardee's oral agreement. Obviously, this would not be a likely risk in competitions under MilSpec or design specifications. However, the proliferation of performance specifications means that offerors' solutions will likely be very different from one another. Therefore, denying contractors the opportunity to discuss the intricacies of their initial proposals, and how they intend to satisfy the government's performance requirements, may preclude the government from getting true "best value." Therefore, I suggest that the Committee refine the term "communications" to ensure that all parties understand that this is not "code" to allow award without discussion, followed subsequently by post-award execution of a contract modification. Rather, refinement of the definition of "communications" would effectively put all parties on notice of the range and limitations of "communications," to prevent any actual or perceived unfair advantage from accruing during competition.

IV. "TECHNICAL LEVELING" AND "AUCTIONING"

(a) Under current rules, Contracting Officers are prohibited from engaging in "technical leveling" and "auction" techniques. These restrictions on discussions promote the goals of fairness and protection of proprietary solutions and confidential data.

(b) The proposed regulations dramatically strengthen the prohibition against technical leveling during "discussions." We strongly support the proposed provisions strengthening the prohibition against technical leveling. However, the proposed regulations also change the rules governing auction techniques. Presently, government personnel cannot (1) discuss with an offeror the cost or price required for further consideration of its offer; (2) advise a bidder of its price relative to other offerors; or (3) provide information about competitors' prices. Instead, they can inform an offeror only that its price is considered by the Government to be "too high or unrealistic." Under the proposed rule, however, the only prohibited auction technique would be "advising an offeror of another offeror's price without that other offeror's permission."

(c) Recommendation: As previously mentioned, we fully support the Committee's continued desire to prohibit technical leveling. However, there is considerable anxiety among contractors, especially non-COTS OEMs, regarding the new proposal liberalizing of "auctioning." To remedy this perception, the government should (1) refine the definition of "communications," (2) use well-crafted performance specifications, and (3) participate in "real" price negotiations with contractors within the competitive range. Moreover, the proposed regulations will authorize the Contracting Officer to inform all offerors of "the cost or price that the Government's price analysis, market research, and other reviews have identified as reasonable." In addition to old-fashioned negotiations, carrying out these actions will enable the contracting community to satisfy the government's interests, maintain a "level playing field" for all parties involved, and afford adequate protection of offerors' proprietary information during competition.

V. PAST PERFORMANCE EVALUATIONS

(a) While the proposed rules of FAR Part 15 do not alter the statutory mandate for evaluation of past performance, such evaluation on initial proposals is a prime determinant of which offerors will be admitted into the constricted competitive range. Therefore, contractors need to garner positive past performance ratings on initial proposals, as only those proposals with the "greatest likelihood of award" will (1) receive award on initial proposals, or (2) be admitted into the constricted competitive range for discussions. This approach disrupts the business development strategies of contractors who consciously invested as "loss leaders" with customer consent. It further forces contractors, who had bid previously to generate profit but encountered technical difficulties, to re-visit the potential of asserting claims, pursuing ADR, or exploring other avenues to protect their integrity. It also wreaks havoc in recently merged contractors, where the acquiring contractor may have become an "impaired asset" as a matter of law. Because of the lack of a refined past performance system throughout the government, the government should allow offerors to address their past performance records during the pre-competitive range phase of the competition.

(b) Therefore, to preclude the "de facto debarment" of qualified offerors from participating in the procurement process, I recommend that agencies provide ample opportunity for offerors to correct or explain adverse past performance on previous contracts. This should reduce greatly the defensive triggering of unsavory administrative disputes and interminable litigation to exonerate erroneous past performance "report cards." I suggest that language be incorporated into FAR 15.407(b) that would require agencies to provide offerors a reasonable opportunity to challenge and rebut adverse past performance evaluations. Such opportunity to rebut erroneous past performance information should be given to all contractors who submit a proposal (pre-competitive range), since inaccurate past performance data could improperly exclude an otherwise qualified offeror from the competitive range. Additionally, contractors should be alerted well in advance of which past performances will be evaluated in a particular procurement. This ("pre-qualification") will enable them to understand how their specific past performance will be evaluated, so that they can make intelligent "Bid/No-Bid" decisions accordingly.

(c) Recommendation: Contracting Officers currently have the discretion to allow offerors to explain poor past performance records or describe those steps that they have taken to improve their past performance. I encourage the Committee to mandate that Contracting Officers must consider contractors' explanations for poor past performance evaluations, as well as those steps being taken by the contractor to remedy past performance deficiencies. Otherwise, the government will effectively "debar" contractors from competing for future contract awards. This mandate will ensure ultimately that the government receives "best value," as it will have the opportunity to select its contract awardees from the largest pool of solutions and pricing.

VI. CONCLUSION

I would like to thank you again for the opportunity to share some of my own beliefs regarding the FAR 15 Rewrite. As the process is just beginning, I would encourage the government to use a "FASA-like" process. Based upon your experience with FASA implementation, and the improvements you made to the process in developing FASA training, I believe strongly that an open process will provide the most successful means of achieving your objectives underlying the FAR 15 revision. Granted, there will be disagreements throughout the process, but that is how sound policy is ultimately achieved. After all, the primary objective of the government, its contractors, and the taxpayer, is to ensure that the government receives "best value," while its contractors earn a reasonable profit for their efforts.

This information is offered only for general informational and educational purposes. It is not offered as and does not constitute legal advice or legal opinions. You should not act or rely upon this information without seeking the advice of an attorney.

Last modified: May 2, 2001