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									for Complex U.S. Government Contracts and Projects




  Principal Author:

  Gregory A. Garrett




                           iii
Preface

This book provides an insightful, comprehensive, and compelling discussion of how to successfully
manage risk on large complex U.S. federal government contracts and projects. The U.S. federal government
departments and agencies collectively spend more than $450 billion annually purchasing products, services,
systems, and integrated solutions to meet the needs of our country. As a result of evolving technologies,
global outsourcing, increasing demands by U.S. citizens for improved services, and tremendous financial
pressures, the complexity of government contracts and projects have grown exponentially during the past
10 years. Thus, now more than ever before, it is vital that government departments, agencies, contractors,
and subcontractors work together to mitigate the growing contractual, schedule, technical, legal, and
financial aspects of risk.

An extraordinary talented team of 12 experienced government contracting, accounting, legal, financial,
engineering, and program management professionals with extensive experience in both government and
industry have worked together to create this unique and valuable book to help business professionals
improve their risk management practices.

In his award-winning style, bestselling author, dynamic speaker, and highly respected consultant Gregory
A. Garrett has built a great team and together they have created a practical guidebook on how to effectively
manage risk on complex U.S. government contracts and projects. This book provides highly effective
processes, tools, techniques, case studies, forms/templates, and proven best practices to simplify the art
and science of risk management. Said simply, this book is a must read!

Dr. William C. Pursch, CPCM
Past President, National Contract Management Association




                                                     v
Dedications

I would like to dedicate this book to all of the men and women who have served our country in the
United States Armed Forces and the United States Civilian Service, supporting more than 60 government
departments and agencies.

In addition, I would like to dedicate this book to the thousands of government contractors who provide
excellent products, services, systems, and solutions worldwide to help our U.S. government agencies
accomplish their vital missions!

I dedicate this book to my lovely wife Carolyn for her patience, understanding, love, support, and the three
greatest gifts—Christopher, Scott, and Jennifer—our children.




                                                     vii
Acknowledgements

I would like to thank the following people for their contributions, advice, expertise, friendship, and support
in development of this book!

Robert A. Burton, Esq.
Paul Debolt, Esq.
Terry Elling, Esq.
William Keating, C.P.A.
John Van Meter, C.P.A.
Brent Calhoon, C.P.A.
Tom Tagle, C.P.A.
David A. Roberts
Dr. Rene G. Rendon, CPCM, C.P.M., PMP
Shaw Cohe, Capt., U.S. Navy, (Ret.)
Eric Esperne, Esq.

A special thank you to my friend Barbara Hanson for her excellent administrative support in putting this
book together for NCMA.

I appreciate the excellent editing, graphics design, layout, and printing of the NCMA staff:

Will Kohudic, Director of Creative Services
Kerry McKinnon, Managing Editor
Chris Hansen, Graphic Designer




                                                      ix
About the Principal Author
Gregory A. Garrett
Gregory A. Garrett, is a managing director with the Government Contractor Services practice of Navigant
Consulting, and operates from the Vienna, Virginia office. He is an internationally recognized expert in
government contracting and project management, bestselling author, highly acclaimed speaker, and during
the past three decades, he has managed more than $30 billion of large complex contracts and projects in
both the U.S. government and industry. He has taught and consulted with more than 25,000 professionals
in over 40 countries. He specializes in cost estimating, contract pricing, contract management, proposal and
capture management, supply-chain management, risk management, and program management.

Garrett provides client support in assessing business risk and providing recommendations for performance
improvement of contractor purchasing systems, cost estimating systems, bid/proposal management prac-
tices, contract pricing systems, contract administrations practices, earned value management systems,
supply-chain management processes, and program management methodologies. He also serves as an expert
witness in support of client claims and litigation.

For the past 15 years, Garrett has served as a highly successful industry executive. Prior to joining
Navigant Consulting, he served as chief operating officer for Acquisition Solutions, Inc., where he led
over 200 consultants providing professional services for more than 30 federal government agencies. He
served nine years with Lucent Technologies, Inc. as chief compliance officer and vice president of program
management for all federal government programs. Previously, he served as partner and executive director
of global business at ESI International. Formerly, he served as a highly decorated military officer for the
United States Air Force, including assignments as program manager of the Space Systems Division,
warranted contracting officer of the Aeronautical Systems Division, professor of contracting management
Air Force Institute of Technology, and acquisition action officer at HQ USAF at the Pentagon.

A prolific writer, Garrett has authored 12 other books and more than 75 published articles on bid/proposal
management, contracting, project management, cost estimating, contract negotiations, risk management,
supply-chain management, and leadership.




                                                     xi
Introduction

This book provides a unique and comprehensive view of what it takes to successfully manage large,
complex, high-technology U.S. government contracts and projects. The contributing authors are a team of
12 experts with extensive experience in U.S. government agencies, military, and industry, with specialized
knowledge and education in accounting, law, contracting, supply-chain management, and program/project
management. Chapter 1 begins by dispelling some of the common myths of government contracting and
then sharing some proven best practices to achieve superior performance results.

In Chapter 2, a holistic yet practical opportunity and risk management (ORM) process is described in great
detail. In Chapter 3, an exhaustive list of tools and techniques are provided to help practitioners (contract
managers, engineers, project managers, proposal managers, etc.) identify, assess, and mitigate risks while
maximizing the potential for positive outcomes. Chapters 4, 5, and 6 provide an in-depth understanding of
the contractual, financial, schedule, and technical aspects of risks when dealing with highly regulated U.S.
government contracts and projects.

Chapter 7 provides a risk-driven perspective of outsourcing strategies and decision-making. Chapter 8
provides a case study view of the typical risk management process implemented by the U.S. Department of
Defense (DOD) for major weapon system acquisition programs. Chapter 9 offers an understanding of the
unique challenges of managing professional services contracts in support of U.S. government departments
and agencies.

Chapter 10 offers an insightful view of earned value management systems and how they can be used as
an effective risk management tool. Chapter 11 provides a valuable legal perspective of risk management
and suggests what actions government contractors can take to mitigate litigation risks. Chapter 12 explains
when and how to use the Contract Management Risk and Opportunity and Assessment Tool.

The book also includes references and an easy-to-use index.

My hope is that you will find this book a valuable and insightful resource, which will help you and your
organization improve performance results through effective risk management!

Sincerely,




Gregory A. Garrett
Managing Director
Navigant Consulting, Inc.




                                                     xiii
Table of Contents

   1      Government Contracting Risk Management—
          Common Myths and Best Practices
                                                                     1
          By Gregory A. Garrett and William J. Keating


  2       The Opportunity and Risk Management Process
          By Gregory A. Garrett
                                                                    9


  3       Opportunity and Risk Management—Tools and Techniques
          By Gregory A. Garrett
                                                                    31

  4       Contractual Aspects of Risk Management
          By Gregory A. Garrett
                                                                    65

  5       Financial Aspects of Risk Management
          By Brent Calhoon, John Van Meter, and Thomas Tagle
                                                                    95


  6       Technical and Schedule Aspects of Risk Management
          By David A. Roberts
                                                                    127

  7       Risk and Purpose-Driven Outsourcing
          By Eric Esperne
                                                                    141


  8       DOD’s Major Weapon Systems: Risk Management Process
          By Rene G. Rendon
                                                                    157

  9       Managing Risk in Professional Services Contracts
          By Shaw Cohe
                                                                    177

 10       Earned Value Management Systems: A Risk Management Tool
          By Gregory A. Garrett
                                                                    195

  11      Mitigating Litigation Risk as a Government Contractor
          By Robert Burton, Paul Debolt, and Terry Elling
                                                                    218


 12       The Contract Management Risk and Opportunity
          Assessment Tool
                                                                    235
          By Gregory A. Garrett

          Index                                                     263




                                           xv
Chapter

     1    Government Contracting
          Risk Management:

          Common Myths and
          Best Practices


          By GreGory A. GArrett And WilliAm KeAtinG




                      1
                           Risk ManageMent foR CoMplex U.s. goveRnMent ContRaCts and pRojeCts




             Introduction
             The top three risks or unwanted events of concern to most government buyers of products and services
             typically include: (1) the products and/or services will not be of satisfactory quality, (2) the products and/
             or services will not be performed and/or delivered on-time, and (3) the products and/or services will cost
             more than the original contractor estimate. Unfortunately, these top three undesirable incidents happen all
             too frequently, especially with large, complex contracts and related projects involving the integration of
             hardware, software, and professional services. In the U.S. federal government marketplace, the probability
             of the occurrence of these top three unwanted events increases as the following risk factors are involved:

             ƒ    Non-compliance with detailed Federal Acquisition Regulation (FAR) and government agency FAR
                  supplements,
             ƒ    Non-compliance with government Cost Accounting Standards (CAS),
             ƒ    Unstable contract/program requirements,
             ƒ    Political and media pressures,
             ƒ    Unstable contract/program life-cycle funding,
             ƒ    Accelerated or delayed delivery schedules,
             ƒ    Variations in quantity, and
             ƒ    Increased government oversight of contractors.

             Risk management, the ability to efficiently and cost effectively mitigate potential problems, is fundamental
             to good business in both the public and private sectors. In this chapter, we will discuss some of the common
             myths and best practices of applying an effective life-cycle risk management process on complex contracts
             and projects in the U.S. federal government marketplace.
Figure 1-1




                                          Risk Management: 10 Common Myths

                 Myth #1     Risk management is well defined, cost-effectively practiced, and successfully implement-
                             ed by most government contractors.

                 Myth #2     The use of a firm-fixed-price (FFP) government contract places all risk on the contractors.

                 Myth #3     The creation of a performance-based contract (PBC) will reduce risk and ensure the
                             government obtains successful contract/project results.

                 Myth #4     The use of government-furnished property (GFP) will always reduce the cost and risk of
                             the contract/project.

                 Myth #5     All risk factors can be identified, quantified, and mitigated.

                 Myth #6     The longer and more detailed the government’s solicitation planning and source selection
                             process, the more likely it will reduce risks and obtain high-performance outcomes from
                             the contractors.

                 Myth #7     The more competitors in a federal procurement, the better the competition.




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         1. goveRnMent ContRaCting Risk ManageMent: CoMMon Myths and best pRaCtiCes




    Myth #8     All government contractors are crooks.

    Myth #9     Project management and contract administration are less important to risk management
                than acquisition strategic planning and source selection.

    Myth #10    Past Experience = Successful Performance.


Myth #1: Risk management is well defined, cost-effectively practiced,
and successfully implemented by most government contractors.

Reality: Most government contractors do not have a comprehensive or life-cycle risk management meth-
odology for their business. Risk management is often fragmented by functional areas (financial, contracts,
engineering, manufacturing, professional services, supply-chain management, etc.) Some organizations do
take the time to conduct a risk identification and assessment as part of their bid/no-bid process. While other
government contractors, who are in a zeal for a deal, bid nearly everything and then hope and pray they can
deliver on their promises. Risk mitigation planning and cost effective implementation is not consistently
practiced by many contractors. Finally, risk management best practices are often not efficiently or cost-
effectively flowed down from prime contractors to their respective subcontractors, often resulting in late
deliveries, higher costs, reduce profits, and upset government customers.


Myth #2: The use of a firm-fixed-price (FFP) government contract
places all risk on the contractors.

Reality: The government also shares in the risk associated with FFP pricing arrangements. The govern-
ment has the risk that the selected contractor may not adequately perform the work thus requiring a remedy
for the contractor’s failure to deliver (i.e., withholding of payment, liquidated damages, termination for
default, etc.). The government also has the risk of unclear definition or specification of the requirements
and deliverables. It is entirely possible for a contractor to perform the work as required and specified by the
government, yet the government still does not get what it really needs or wants because of the government’s
inadequate statement of requirements and outcomes/deliverables. In addition, FFP government contracts
may contain certain government contractual obligations (e.g., government furnished property (GFP), gov-
ernment furnished equipment (GFE), and/or government furnished information (GFI) in accordance with
FAR Part 45.


Myth #3: The creation of a performance-based contract (PBC) will
reduce risks and ensure the government obtains successful con-
tract/project results.
Reality: Unfortunately, many government agencies do not properly create performance-based contracts,
often resulting in higher risks and poor to mediocre performance results. For example, many government
agencies suffer from the following challenges:

ƒ    Incomplete or inadequate performance work statement (PWS) or statement of objectives (SOO);
ƒ    Use of an overly detailed and highly prescriptive statement of work (SOW);



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               Risk ManageMent foR CoMplex U.s. goveRnMent ContRaCts and pRojeCts




ƒ   Insufficient quality assurance surveillance plans;
ƒ   Poor selection of performance standards and metrics to drive contractors to high-performance results;
ƒ   Inappropriate contract incentive plans and/or failure to properly administer and reward superior results
    or apply penalties for poor performance;
ƒ   Inadequate post-award contract administration support due to shortage of resources, inadequate train-
    ing, and poor quality control;
ƒ   Unreliable data contained in the Federal Procurement Data System (FPDS), resulting in no one really
    knowing to what extent performance-based contracting is being used, and how successful it is or could
    become, in improving government contracting.


Myth #4: The use of government-furnished property (GFP) will
always reduce the cost and risk of the contract/project.

Reality: Sometimes GFP does reduce the cost and risk of the contract or project, but
many times it does not. In fact, some government contractors refer to the GFP as “government-furnished
problems” because the government property is frequently delivered late, damaged, or defective. Plus, the
government property requirements stated in FAR Part 45 can add additional costs for the marking/identifi-
cation, tracking, maintenance, transportation, and documentation of the subject property.


Myth #5: All risk factors can be identified, quantified, and mitigated.

Reality: If a government agency or government contractor develops and practices risk management as an
integrated aspect of all of their business activities, and uses knowledge management throughout the project
life cycle, then most risk factors can be identified, quantified, and mitigated. However, many organiza-
tions do not develop and practice risk management as an integrated aspect of all of their business activities.
Plus, most organizations have not fully embraced the power of capturing, sharing, and reusing knowledge
to enhance risk management. Most organizations in both the government and industry need to ensure they
have developed and implemented knowledge-based tools to capture knowledge—before, during, and after
the performance of the work, not just after completion of the project. Even when doing all of the aforemen-
tioned actions, it is still possible some unknown and unforeseen challenges may occur.


Myth #6: The longer and more detailed the government’s solicitation
planning and source selection process, the more likely it will reduce
risks and obtain high performance outcomes from the contractors.
Reality: It is not the quantity of people or total time spent, rather it is the quality of the people and their respec-
tive knowledge, experience, dedication, and executive-level commitment that typically determines whether a
government agency’s acquisition planning yields high-performance outcomes from the selected contractors.


Myth #7: The more competitors in a federal procurement,
the better the competition.

Reality: Again, the quantity of bidders does not necessarily directly relate to the quality of the competi-
tion. Sometimes, there may be only one or two high quality providers of the needed products, services, or



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         1. goveRnMent ContRaCting Risk ManageMent: CoMMon Myths and best pRaCtiCes




solutions, thus seeking three or more bids/proposals may actually result in higher acquisition costs due to a
longer bid/proposal evaluation process and related source selection activities.


Myth #8: All government contractors are crooks.

Reality: Most government contractors are honest, reliable, and dedicated companies focused on support-
ing government agencies in achieving their respective mission requirements while meeting their stakehold-
ers’ objectives. Unfortunately, there is a relatively small percentage of government contractors who do act
illegally and their bad actions are frequently publicized by the press and Congress, creating a very negative
perception of the industry.


Myth #9: Project management and contract administration are less
important to risk management than acquisition strategic planning
and source selection.
Reality: Project management and contract administration are in fact just as important, if not more so,
to risk management than the acquisition strategic planning and source selection. Said simply, it is good
to have an effective plan and a qualified contractor, but it is better to ensure project execution of the plan
and contractor delivery of the promised results. Too often, both government agencies and government
contractors are in such a zeal for the deal, they focus nearly all of their resources on the pre-award and
award phases of the acquisition and too little resources for the critical post-award project management and
contract administration activities.


Myth #10: Past Experience = Successful Performance.

Reality: Solely because a person or organization has experience in providing a product, service, or solu-
tion in the past does not necessarily mean that the individual or entity will be successful in delivering a
similar product, service, or solution in the future. In fact, if the individual, organization, or company has a
track record of poor performance in their past experience, then it is quite likely they will have challenges
in achieving successful performance outcomes in the future. Clearly, the lowest risk scenario is to find a
contractor with extensive experience, expertise, and demonstrated high-performance results on delivery of
similar products, services, and solutions.


Risk Management Best Practices
In order to reduce business risks and optimize performance results in the federal Marketplace, both govern-
ment agencies and government contractors should develop a comprehensive or holistic approach to risk
management. A comprehensive approach to risk management should appropriately addresses the “Four Ps”
to success: people, processes, performance, and price.




                                                       5
                         Risk ManageMent foR CoMplex U.s. goveRnMent ContRaCts and pRojeCts
Figure 1-2




                                            Life-Cycle Risk Management

              4 Ps                                      Proven Best Practices

             People       ƒ   Select highly qualified, competent, and certified business professionals.
                          ƒ   Provide appropriate individual, team, and organizational performance standards,
                              metrics, and incentives.
                          ƒ   Provide timely professional continuing education, cross-functional education and
                              experience, and on-the-job training in risk management .
                          ƒ   Provide timely and appropriate performance feedback.
                          ƒ   Develop realistic requirements and delivery schedules.
                          ƒ   Develop and implement an effective mentor/coaching program.
                          ƒ   Ensure effective training in risk management processes and tools are provided.
                          ƒ   Create and consistently practice a “tone at the top” message of the need and value of
                              life cycle risk management.
                          ƒ   Use expert consultants as needed—seek advice.

             Processes    ƒ   Develop an integrated life-cycle risk management process that appropriately
                              addresses all functional areas of the organization from beginning to end of each
                              contract.
                          ƒ   Incorporate knowledge management tools to ensure knowledge is captured, shared,
                              and reused before, during, and after work is performed throughout the contract/
                              project life cycle.
                          ƒ   Practice disciplined systems engineering and program management.
                          ƒ   Implement an effective earned value management system (EVMS).
                          ƒ   Use multi-year procurement (MYP) and multi-year funding (MYF) to ensure stable
                              funding.
                          ƒ   Develop and use an effective cost estimating and accounting system.
                          ƒ   Ensure risk identification tools and techniques are developed and appropriately
                              implemented.
                          ƒ   Develop an appropriate governance structure.
                          ƒ   Provide effective processes and tools to assess the probability and financial impacts
                              of potential risks (technical, schedule, and contract).
                          ƒ   Allocate funds for appropriate risk mitigation planning and actions.
                          ƒ   Build a world-class supply chain for your organization.
                          ƒ   Maintain configuration control of the contract requirements and limit the number of
                              changes.

             Perfor-      ƒ   Create a performance-based culture within your team and organization.
             mance        ƒ   Communicate your organization’s and team’s vision, mission, and performance goals.
                          ƒ   Develop performance-based contracts with your clients and suppliers.
                          ƒ   Create an effective ethics and compliance internal control system.
                          ƒ   Practice risk management, using a life-cycle risk management process.
                          ƒ   Ensure regulatory and contract (FAR, CAS, SOX, etc.) compliance.




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             1. goveRnMent ContRaCting Risk ManageMent: CoMMon Myths and best pRaCtiCes




     Perfor-      ƒ   Terminate all or part of poor performing programs as soon as possible.
     mance        ƒ   Remove poor individual performers if they are not adding value to the team and
                      project.
                  ƒ   Remedy or terminate poor performing subcontractors.
                  ƒ   Manage contract changes.

     Price        ƒ   Select appropriate pricing arrangements, given the risk vs. reward opportunity.
                  ƒ   Ensure life-cycle costs are properly included in the budget and contract funding.
                  ƒ   Create a management reserve in the project budget.
                  ƒ   Avoid buy-in situations.
                  ƒ   Price and negotiate contract changes appropriately.
                  ƒ   Select and tailor contract terms and conditions to properly address items not priced
                      into the contract.
                  ƒ   Use appropriate cost estimating methods and techniques.
                  ƒ   Conduct price analysis and/or cost analysis.
                  ƒ   Obtain independent cost estimates.
                  ƒ   Hire cost/pricing experts, either internally or through consultants.



Summary
The federal government marketplace is full of business risks for both government agencies and govern-
ment contractors involved in the buying and selling of products, services, and solutions. In this first chapter,
we have addressed 10 of the common myths associated with risk management in the federal government
marketplace. Plus, we have shared numerous proven best practices to identify, evaluate, and mitigate risks
throughout the contract management life cycle using a comprehensive approach that addresses the 4 Ps to
success: people, processes, performance, and price.

In the following chapters, we will provide you with a much more detailed discussion of the types or cat-
egories of risk your organization may encounter when managing complex U.S. government contracts and
projects. Plus, we will provide you with numerous specific processes, tools, and techniques to address the
contractual, financial, schedule, technical, and legal aspects of risk management in the U.S. federal govern-
ment marketplace. In this chapter, we have provided just the tip of the iceberg of what it takes to success-
fully manage large and complex U.S. government contracts and projects.


Questions to Consider
1.    How well does your organization address the holistic nature of risk management?

2.    How cost-effectively and efficiently does your organization mitigate contract and project risk factors?

3.    How successful is your organization in achieving high performance business results on a consistent basis?




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