Let’s talk about that now infamous “September 14th Memo” from the Deputy Secretary of War. The one titled “Fostering One Strong Industrial Base.” If you haven’t seen it yet, you can read it here. There is a lot in the memo, and I’m not going to cover all of it, but there are some big things to unpack. I will do my best to cover those that are most relevant to our customers.
The memo itself appears to take aim at the fundamental business system compliance requirements outlined in Defense Federal Acquisition Regulation Supplement (DFARS)
Before I get started, I just want to share that, like most of you, I have no inside knowledge or information about any of this. In hindsight, the memo isn’t surprising given the administration’s priorities, but it still caught much of the community off guard, and I am left to interpret it as much as anyone else. Like other federal departmental memos and executive orders, this will shape policies and contract language to come, but it is not, itself, contract law. A few provisions took effect on signature. For example, any new solicitation that would bring a business unit under full CAS coverage now needs the Under Secretary of War for Acquisition and Sustainment to approve the acquisition strategy in writing, and discretionary business system reviews now require a written determination of specific, material risk. Most of the changes, though, will come later through class deviations, rulemaking, and contract modifications, and we will have to wait and see what those look like. Government contractors should continue to read Requests for Proposal (RFP) and contracts for specific language regarding business system compliance and be aware that contract modifications may be coming in the future.
So let’s dig into it. I’m going to focus on a few key elements.
From my perspective, the biggest impacts from this memo are the changes to CAS. This is emphasized in the opening page:
“The DoW will move from government-unique Cost Accounting Standards (CAS) to the accounting every American company already uses - Generally Accepted Accounting Principles (GAAP).”
This is significant because CAS is the basis for cost-plus contracting that has traditionally been applied to major development contracts where the other business system compliance requirements kick in. CAS compliance helps ensure that direct costs on government contracts are properly segregated from overhead, G&A, and other indirect costs in a way that assures programs are only billed for costs incurred. The cost-buildups that are documented in a company’s disclosure statement also form the basis for cost-estimates on proposals, and for budgeting and forecasting in an Earned Value Management System (EVMS). That’s not to say these other systems cannot function without CAS accounting, but in my experience, companies with CAS compliant accounting systems are already set up for an EIA-748-E compliant EVMS in a way that companies with traditional GAAP accounting systems often are not.
Note that I call out EIA-748 revision E specifically because in this version, Guideline 11 adds explicit language about using indirect rates to establish indirect budgets. When combined with GL 15, which directs the collection of direct and indirect costs, and GL 20, which calls for analyzing indirect performance, the importance of CAS accounting to the process becomes clearer.
The memo goes on further to say:
“Executive Order 14402 makes fixed-price contracts the default and reserves cost-based contracts for basic research and for the development of major systems. Where there is a market - competition, comparable sales, reliable price history - the market sets the price. Where there is no market - major sole-source development and procurement - we will rely on cost data drawn from a company's existing records rather than invasive oversight.”
This is a theme throughout the memo. Rely on data from contractors’ native systems without system validation and oversight.
Less is said about EVMS and the other business systems, but in general, the memo directs the department to issue class deviations to raise thresholds and reduce compliance burdens. On EVMS, specifically, the memo states:
Confine earned value management to major development programs and, where the Government retains cost risk, major long-duration production programs, with the boundary set in the implementing deviation; retire the separate government system validation regime, using integrated baseline reviews to assess contract baselines; and accept schedule, actuals, and estimate-at-completion data from contractors' native systems;
To me, there is a mixed bag here. I think this is very clear that Defense Contract Management Agency (DCMA) system validations are over. I don’t know how else to read “retire the separate government system validation regime.” In its place we have a statement about using Integrated Baseline Reviews (IBR) to assess contract baselines, which is not a bad thing. I think most earned value management (EVM) practitioners would agree on the value of an IBR and how critical it is to a successful EVMS. But an IBR is not an EVMS review and never has been. Some civilian agencies do use the IBR as a system validation exercise because they don’t have resources to perform separate validation reviews, and the FAR requires the Cognizant Federal Agency (CFA) to determine the system compliant. In my experience, turning an IBR into a validation review means you get neither a good baseline review, nor a good system validation.
But a more careful read of this section is much more alarming. It says that the IBR is to review the baseline (nothing about system validation, as currently required by FAR and DFARS) and then says “accept schedule, actuals, and estimate-at-completion data from contractors' native systems.” There is no mention of baseline/budget, or performance data at all. We can infer that baselines still matter because of the IBR, but that could simply be a plan at a point in time, not a Performance Measurement Baseline (PMB) that is used to manage the program. I would like to think that this is just a “lost in translation” moment, where someone who doesn’t fully understand earned value was writing the memo, and earned value performance data was implied.
Most of the rules being overturned by this memo are baked into DFARS and, therefore, into existing contracts. If you have a contract with CAS, EVMS, or any of the other four business system compliance requirements in it, keep doing what you are doing. But expect things to change quickly. Here is what is already in effect, and what to expect over the next 90 days or so.
For all the change coming, a lot stays the same. Here is what the memo leaves in place:
One practical note: when a no-cost modification shows up to remove a business system clause, read it carefully. Removing the DFARS EVMS clause is not necessarily the same as removing EVM reporting. Integrated Program Management Data and Analysis Report (IPMDAR) requirements are typically ordered separately through a Contract Data Requirements List (CDRL), and they may stay in place.
So, is EVM dead? DCMA validation of EVM systems on DoW contracts appears to be on its way out. EVM itself is not. Here is what the memo leaves in place, at least for now:
That leads me to why I’m more optimistic than the headline suggests. For a lot of companies, an EVMS has been something you build to pass a DCMA review and maintain to survive surveillance. Take away the review, and the question changes from “Will this pass?” to “Does this help us run the program?” That was always the question EVM was supposed to answer, and the rest of this memo gives contractors good reasons to answer it well:
To be fair, there is a real risk here, too. Validation, for all its cost and frustration, was an independent check. Without it, some companies will let their discipline slip, and I expect that to show up first at the IBR and then in EACs and program outcomes. Companies that want to avoid that can hold themselves to the same standard on their own terms, through periodic internal or independent assessments against EIA-748, with no government requirement driving it.
The government’s review of your EVMS may be going away. The reasons to have a good one are not. Long live EVM.
Have questions about what this memo means for your EVMS? Learn more about our Earned Value Management services, or contact us to talk it through.