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Getting the Best Deal

Feb. 10, 2013 - 02:55PM   |  
By JAMES GILL   |   Comments
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There has been much talk about making U.S. weapon systems “affordable.” We most certainly have a right to expect value for our money. The question seems to be, are we getting it?

Many in the Department of Defense acquisition leadership seem to believe that we are not. Congress most certainly does not. My belief is that once the new space systems (Advanced Extremely High Frequency, Space Based Infrared System and GPS 3) have the opportunity to demonstrate their capabilities to the war fighter, there will be little doubt that we are the beneficiaries of a quality acquisition system that, in the end, provides an incredible product.

We haven’t heard ourselves described as the “Centers of Excellence” for some time, but I expect that to change in the near future.

Why? No. 1 would be the GPS program, which has given the war fighter, and also the commercial, civilian population, an incredible capability that is the stuff of legend. However, if we go back to the initial development phase of that system, we would find that it was fraught with criticism, called too costly, too much behind schedule and had technical challenges that seemed hopeless.

How about the Defense Support Program? It was first developed to provide missile warning capabilities during the height of the Cold War. It too went through developmental challenges, with critics warning that it would “break the bank” for the DoD and could not possibly overcome the technical challenges of extending surveillance into space. Perhaps people have forgotten many of the challenges because the system was classified until well into its operational phase.

How about the Defense Meteorological Satellite Program weather satellite, which was fielded during the 1960s and has performed so well that it is outlasting its predicted life expectancy, giving the DoD several additional years to develop a replacement? When it was first developed, many people did not believe it could provide the capabilities that it has clearly exceeded.

Our next generation of major programs is in the production and deployment phase. Their underwear is showing in that many of the technical, cost and schedule challenges are the gist of Government Accountability Office reports. Several have alleged that the DoD has wasted billions developing these systems.

I have not seen a program director who was satisfied with the programmatic overruns and Nunn-McCurdy breaches that many systems have faced in the past 15 to 20 years. Having said that, I am also confident that government program managers and contractors expended due diligence to meet often unrealistic cost, schedule and technical goals, and incorporate efficiencies in fielding the final product.

We are moving toward another period of fiscal frugality in the development of our next generation of DoD weapon systems. Each time this has happened, we have attempted to resolve the crisis by moving to more commercial-like ways of buying. Several administrations have incorporated myriad ideas designed to reduce costs and increase effectiveness; acquisition reform is the most recent example.

One suggestiongathering steam in Washington is to have the program offices get more involved at the major subcontractor level within sole-source proposals. This would give the government visibility into how much profit the prime is allowing the major subcontractors.

What is the actual profit rate that major subcontractors have experienced over the past five years or so? The Federal Acquisition Regulation requires the prime contractor to provide the government with an assessment of the subcontractor’s proposal, but to some, this is akin to asking the fox to guard the chicken coop.

The prime will be allowed to have the cost of the subcontractor — including profit — as an allowable cost against the contract. These costs are the basis for the prime’s profit, and so it is asking the prime to reduce its cost if it reduces the subcontractor’s costs — including profit. Why would the prime act against its own interests this way?

To determine whether the subcontractor has received undue profit as a result of this situation, the government is asking for the data to determine the actual profit rate the subcontractor received. On an incentive contract, the subcontractor would receive additional profit in the event of an underrun. This would be relatively easy to determine. The additional consequence of this underrun is that the prime contractor would also underrun its contract, increasing its profit.

If the prime had a firm, fixed-price subcontract, any underrun would be hidden in the price since there is no sharing. This means that every dollar of underrun on that contract would be a dollar of profit.

Perhaps it would be a better plan to provide an incentive to the prime contractor to reduce the cost to the government of the subcontractor, rather than inflate it. This could be accomplished by increasing the fee applied against the subcontractor based upon the job that the prime did in reducing the cost to the government of the subcontracted effort. This might involve positive and negative incentives for prime and subcontractor.

Contractors react to our incentives in different ways. Some rush out to negotiate their major subcontracts prior to negotiating with the government, while others wait until negotiations with the government are completed before negotiating more stringent arrangements to their subcontractors.

The ultimate goal is a fair and reasonable deal for both prime and subcontractor. Often, the best deal is the one in which both parties walk away feeling they didn’t get everything they wanted but did get everything they needed.

We are continually on the lookout for ways to reduce costs, while ensuring mission success. We have to ensure that, in the rush to minimize cost, we do not add undue risk to the ultimate goal, which is to provide the very best systems to the war fighter.


By James Gill, who works at the U.S. Space and Missile Systems Center, Los Angeles Air Force Base, and is a former professor in the CSSB National Security Studies Program. These views are his own.

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