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The Defense Department knows cost increases due to inflation may begin to affect contracts. But, according to recent guidance, defense contracting officers are urged to "limit the scope" when using clauses for pay adjustments.
"The current economic environment requires we understand the impacts of inflation to existing contracts and consider various approaches to manage risk of inflation to prospective Department of Defense (DOD) contracts," John Tenaglia, the principal director for Defense Pricing and Contracting, wrote in a memo dated May 25.
"Against this backdrop, DOD contractors and contracting officers (COs) alike have expressed renewed interest in using economic price adjustment (EPA) clauses."
Handling cost increases for existing contracts depends on the contract type and contractors are responsible for notifying DOD when costs are approaching the limits laid out in those agreements, the memo states. But an EPA clause could be a solution, when approached with care, for developing contracts or those in negotiation.
"For contracts being developed or negotiated during this period of unusually high inflation, an EPA clause may be an appropriate tool to equitably balance the risk of inflation between the Government and contractor," Tenaglia wrote. "In crafting an EPA clause, COs must be mindful that the impacts of inflation vary widely, depending on the nature of costs…the CO should take care to use an index that is closely related to the cost components judged to be most unstable."
The document also stresses that "any clause addressing potential contract cost or price changes due to economic conditions, e.g. inflation, is effectively an EPA clause, whether or not the term EPA appears in the clause." Also, contracting officers should "limit the scope" of such clauses to "costs most likely to be impacted by economic fluctuations and should exclude costs that are not likely to be impacted by inflation from adjustment under the clause," such as depreciation, or labor costs where a union agreement exists.
The memo comes as inflation costs hit everyday items and services, such as gasoline and food costs, and as defense officials and congressional leaders push for more funding in the budget for 2023 to offset higher costs.
Adm. Michael Gilday, the chief of naval operations, told the House Armed Services Committee during a May budget hearing that inflation "adds another stressor to this budget." Gen. James McConville, the Army's chief of staff, also told the committee in a separate hearing that he was "very concerned about the impact of inflation on our soldiers and families" particularly regarding proposed pay increases that would be eclipsed by current inflation rates.
"The budget was planned around about a 2% inflation rate," McConville said, "we wanted to give our soldiers and families, and our civilians, a 4.6% pay raise that was based on the employment cost index…And that number is a lot less than 8%."
DOD estimated cost growth from fiscal 2022 to 2023 based on the gross domestic product price index to be around 2.2%, the Pentagon noted in a letter to Republican leaders dated May 2. The letter also notes that the 2023 budget request added $20 billion per year to protect buying power and account for compensation increases, while also acknowledging that "adjustments may be needed as prices fluctuate."
Ranking members on the defense committees, Sen. Jim Inhofe (R-Okla.) and Rep. Mike Rogers (R-Ala.), criticized the Pentagon for not taking precautions against potential effects of inflation and resurfaced calls for a budget increase above inflation rates.
"Overall, we are concerned that the Department is not taking a proactive stance to mitigate the harmful effects of inflation," the ranking members wrote in a statement May 4 following the Pentagon's response to an inquiry.
"Remember: At the end of the day, getting the inflation number right is important, but it's only part of the story. If we want to protect our country and meet national security needs, we need 3 to 5 percent real growth above inflation. We plan to accomplish this goal in this year's NDAA."
Democrats, in turn, have warned of the potential for wasteful spending as defense budgets increase and advocated for acquisition reform as an alternative.
Of all the challenges the Defense Department faces in buying and building software, the rules that govern how it pays for it are widely-considered one of the biggest. And Defense officials think they have a plan to convince Congress to finally change them.
The Pentagon is lining up a series of nine acquisition programs it wants to use as test cases to prove out the concept of using a new Congressional appropriations category that's specific to software. They would let those programs break free from the "color of money" structures that were originally designed for military hardware, but make little sense in the context of the agile software development model DoD aspires to embrace.
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'Tis the season for.....reclamas? It sure is! The annual change from summer to fall brings not only cooler weather and football season, but also the OSD Program Objectives Memorandum (POM) / Budget Estimate Submission (BES) and subsequent OSD review of your program's submissions - which can result in your need to write a reclama. So if it's been a while since you have written one, or just want to make sure you are following best practices, take a minute to download the Reclama Reference Card. This card is a 1-page (2-sided) quick reference desk guide that describes what a reclama is, as well as best practices when writing one ("Do's and Dont's").
While the DoD clearly demonstrates success in its warfighting mission, it has been unable to pass a financial audit in accordance with law. It is vital for everyone supporting the DoD to be aware of the FIAR efforts and associated initiatives that will drive future actions for continuous performance improvement and compliance with laws and regulations.
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Effective immediately, in response to the Coronavirus Disease 2019 (COVID-19) national emergency, the progress payment rates at Defense Federal Acquisition Regulation Supplement (DFARS) 232.501-1 are increased from 80% of incurred costs to 90 percent for large business concerns and 95 percent for small business concerns. The class deviation remains in effect until rescinded.
DoD and DAU's first priority is the protection of our people. While DAU will not offer any classes in person until further notice, please do not cancel your class attendance yet. Students will be notified several days in advance of the scheduled start date whether their class will be cancelled or offered online.
When: 1/15/2020, 12:30 PM, Eastern Standard Time
What: Value Added Tax (VAT) can potentially be a major cost driver on purchases made by DoD entities or its partners abroad. Policies require that DoD seek VAT exemption from foreign countries to the maximum extent practicable. As such, it is necessary that program management, contracting, financial management, and other acquisition personnel are knowledgeable of VAT exemption since it may pertain to international efforts.
Mid-Tier Acquisition (MTA). Other Transaction Authorities (OTA). Go faster. Take on more risk. Welcome to today's acquisition environment. But how is the DoD Financial Manager, as well as the Financial Management system, supposed to keep up? DAU Professor Stephen Speciale explores this and more in his recent publication in the DoD FM Connection Newsletter. Don't miss his excellent insights!
The Department of Defense (DoD) has experienced several major muscle movements since Fiscal Year (FY) 2016. Congress provided DoD with flexible options to complete acquisition and business endeavors in support of national defense. These additional options and potential near-term changes are intended to significantly transform the way DoD conducts business.
Besides acquisition enhancements, Congress provided DoD a record high budget amount for FY 2019. Furthermore, the president's FY 2020 budget request for DoD included the largest amount for research and development in 70 years. Although DoD's acquisition options have been modernized in recent years, the processes by which DoD receives and allocates its funding have not been modernized to the same extent. Unprecedented funding levels tend to erode financial management discipline, and DoD must execute in a manner that provides accountability and maximum value to its ultimate stakeholder—American taxpayers. To complete acquisitions at the speed of relevance and produce the most efficient business outcomes, DoD needs to transform its business processes that support and complement the various acquisition alternatives. This article assesses the current environment and provides suggestions that could allow DoD to achieve its ultimate objectives in the new era of acquisition.
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Does your program do business or make purchases such as equipment, materials, facilities and services in a foreign country? Are you paying that country's consumption based, or sales, tax on those purchases? Wouldn't you rather not pay those taxes and save the funds? If so, then check out DAU Professor Stephen Speciale and MDA Program Manager Matthew Lawrence's latest article on Value Added Tax Exemptions:
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How does your organization manage risks while meeting its objectives? Across the public sector, including the Department of Defense (DoD), organizations should have in place a Managers' Internal Control Program (MICP). Whether a Major Defense Acquisition Program (MDAP) or an administrative office, all organizations and their personnel can find value from the MICP. Read more here:
Then you will want to check out Stephen Speciale's "VAT Is Where It's At" article in the latest Defense Acquisition Magazine, as well as the related tool on the DAU Website!
"VAT Is Where It's At" (Securing Value Added Tax Exemptions on International Acquisitions):
Value Added Tax (VAT) Exemption Calculation Tool:
So you may have been reading or watching news coverage this week covering a potential government shutdown on Friday, 7 December, and thought, "Wait - I thought we received a full fiscal year (FY) 19 appropriation?". Well, you would be correct - but just for the Departments of Defense, Education, Veterans Affairs, and Energy. For the other governmental departments, a continuing resolution (CR) through 7 December was passed by Congress (and signed by the President) prior to the start of FY19. Remember, Congress needs to pass 12 Appropriations Acts each FY:
- Agriculture, Rural Development, Food and Drug Administration, and Related Agencies
- Commerce, Justice, Science, and Related Agencies
- Energy and Water Development, and Related Agencies
- Financial Services and General Government
- Homeland Security
- Interior, Environment, and Related Agencies
- Labor, Health and Human Services, Education, and Related Agencies
- Legislative Branch
- Military Construction, Veterans Affairs, and Related Agencies
- State, Foreign Operations, and Related Programs
- Transportation, Housing and Urban Development, and Related Agencies
As such, Congress has until midnight Friday, 7 December, to either pass all remaining appropriations acts for FY19 or vote to pass another CR. Otherwise, those departments who are funded under the remaining 7 appropriations acts will be forced to shut down.
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