An Acceptable Proposal: Set Appropriately High, Clear Standards for DoD’s Auditors and LPTA Competitions
On April 30, 2015, the House Armed Services Committee passed H.R. 1735, the National Defense Authorization Act for Fiscal Year (“FY”) 2016, with an amendment (Log #325rl) that could shape how the Department of Defense (“DoD”) acquires audit and audit readiness services for its Financial Improvement and Audit Readiness (“FIAR”) Plan. Under the FIAR Plan, DoD must validate the audit readiness of its financial statements by September 30, 2017, and it must submit to Congress an audit of its FY 2018 financial books by March 31, 2019. The amendment states that, for DoD to meet these deadlines, “it is imperative that [DoD] not sacrifice contracts with firms who have the proper credentials and expertise” to provide DoD with audit and audit readiness services. Hence, the amendment bars the use of a lowest-price, technically-acceptable (“LPTA”) evaluation method to procure such services unless DoD (1) establishes “the values and metrics for the services being procured, including domain expertise and experience, size and scope of [an] offeror’s team, personnel qualifications and certifications, technology, and tools”; and (2) considers offerors’ past performance history. The amendment was offered by Representative Michael Conaway (R.-TX), who ten days earlier co-signed a letter that asked for the Secretary of Defense’s “reaffirmed leadership and commitment to [DoD]’s financial management and auditability.”
The amendment’s restrictions on DoD’s use of LPTA appear to be appropriate, particularly where—as the amendment stresses—the audit effort is “extremely complicated,” and the services to be performed are “complex and evolving.” Indeed, “the effort to finish and institutionalize auditability is one of the more challenging management tasks that has ever faced [DoD].” We often report on the limitations and propriety of the LPTA evaluation method—a methodology that, as its name suggests, has no regard for an offeror’s technical advantages or unique merit. We recently covered a March 5, 2015 DoD memorandum from Under Secretary of Defense Frank Kendall, which notes LPTA’s “clear, but limited place in the source selection ‘best value’ continuum.” That memorandum affirms that LPTA is appropriately used “only when there are well-defined requirements, the risk of unsuccessful contract performance is minimal, price is a significant factor in the source selection, and there is neither value, need, nor willingness to pay for higher performance.” Similar guidance can be found in our December 18, 2013 article addressing appropriate uses of LPTA.
Yet this amendment does not merely restrict DoD’s use of LPTA. It also admonishes DoD to raise and clarify the standards of its audit and audit readiness services. In other words, the amendment allows DoD to use LPTA, but only insofar as DoD first sets appropriate standards of acceptability with “values and metrics” that recognize, among other things, “expertise and experience,” the “size and scope” of the audit team, and its auditors’ “qualifications and certifications.” And in that regard, the amendment has broader relevance. First, DoD and other federal agencies should consider applying similarly high, clear standards to the government employees and private firms that audit contractors. Such audits are known to fail even generally applicable auditing standards and procedures. Second, it suggests that an agency might effectively use LPTA even when it intends to prevent a “race to the bottom” in price and quality, which is the typical consequence of using an LPTA evaluation. If an agency is able to set higher, clearer criteria for proposal acceptability, it can still solicit the lowest possible prices, but for performance that satisfies higher, appropriate standards.