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Group Warns of Aversion to Buying Commercial Products

Jan. 27, 2014 - 02:10PM   |  
By ZACHARY FRYER-BIGGS   |   Comments
Critics of buying commercial products for military use point to the US presidential helicopter program as an example of runaway costs. The VH-71, a variant of AgustaWestland's AW101, was a candidate.
Critics of buying commercial products for military use point to the US presidential helicopter program as an example of runaway costs. The VH-71, a variant of AgustaWestland's AW101, was a candidate. (AgustaWestland)
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WASHINGTON — Although an attempt to change how the Pentagon buys commercial products failed in 2012, and other policy changes have been beaten back by aggressive industry lobbying, a de facto aversion toward buying commercial products for military use has taken hold, the Aerospace Industries Association (AIA) said.

The commercial acquisition process, designed to allow easier access to commercial products for the Pentagon by creating a streamlined cost assessment procedure, has faced criticism for allowing products to be sold at inflated prices with less accountability. But while no formal rules have changed, the message has trickled down that acquisition officials should avoid declaring products commercial when possible, AIA executives said.

“We’re stuck with this back door policy that’s infiltrated the services,” said Christian Marrone, vice president for national security and acquisition policy at AIA. “We’re seeing a lot of commercial companies who are doing business right now with the [Defense] Department who are getting very bewildered by this trend that they’re seeing, and so you’ve got a lot of companies who have a very healthy commercial business who are in the industrial base who are starting to question, ‘do I make the investments.’ ”

The 2012 formal push to eliminate commercial “of a type” contracts, deals that allow for products that are similar to commercial items but modified for the military, was led by Shay Assad, director of defense pricing at the Pentagon. Much of Assad’s criticism about the commercial acquisition process has centered on the application of the process to products that have no market outside of the military, allowing defense companies to use the commercial tag to avoid scrutiny.

“We know it’s being abused,” Assad told Defense News in a 2012 interview. “The law enables contractors — and they have — to basically use it as a shield.”

In a statement released by the Pentagon on Jan. 23, Assad said no new guidance has been issued to push acquisition officers away from declaring an item commercial.

“There has not been, nor is there now, any intention to reduce the use of the commercial acquisition process,” Assad said. “The only additional guidance that has been given to the acquisition community is to ensure that the prices that they pay for commercial items can be determined to be fair and reasonable. When there are sufficient sales in the commercial market place to determine a market based price, contracting officers have been told they can assume the market based price is fair and reasonable. However, when there are no commercial sales or insufficient sales for an item that is claimed to be commercial, then 10 USC 2306a(d) provides the department the authority to require other than certified cost/pricing information to assist it in making the determination of fair and reasonable pricing on behalf of the department and the taxpayers.”

Mary Jane Mitchell, who is slated to take over for Marrone at AIA in an acting capacity when he departs to become chief of staff for the secretary of homeland security Jan. 31, acknowledged that there have been no official rule changes.

But Mitchell, a former acquisition official, emphasized that acquisition officials have changed their behavior anyway. “Really this is all application and practices,” she said. “I think there’s less department trust, which is a powerful word, but I think there is less trust than back in the days when I actually used to work on acquisition programs.”

Determining whether a shift has happened, or the impact of that shift, is essentially impossible given that each determination on whether a product is commercial is unique. But AIA executives and analysts pointed to anecdotal evidence that there has been a meaningful shift.

The additional cost data that is required for non-commercial acquisition can be very difficult for commercial companies to figure out, Marrone said.

“When you start wanting to pull out specific cost and pricing data, it’s simply not kept that way in the company because they have commercial lines, and they do everything based on their commercial businesses,” he said. “To be able to pull that out of a commercial company is near impossible.”

The AIA executives argued that the additional information creates added cost for the companies, which pass the cost back to DoD as overhead.

The other major concern they voiced for commercial companies is the increased desire for data rights that has become common in the acquisition process. For defense companies, which frequently use government dollars to develop the products, that often makes sense. But for commercial companies developing products on their own dime, it can create a difficult equation.

“It’s not just the hit they might take in the margin from dealing with the government acquisition process, but they also don’t trust them to not distribute their company proprietary data,” said James Hasik, a fellow with the Atlantic Council.

While Hasik listed some of the potential problems for companies, he said the bigger problem could be companies declining to make deals.

“I would actually worry more about the impact on the government than the impact on the suppliers and the industry,” he said. “Do I think that a company like United Technologies is going to walk away from doing business with the US government because they don’t like the way that they’re being treated on commercial determinations? It all depends on what percentage of their business comes from the government.”

Thus far no company has publicly declared that it won’t be seeking DoD contracts, but any such decision is likely to be far more quiet than that, Marrone said.

“They’ll start making internal choices that you’ll never see, and that’s the really nefarious aspect of this,” he said. “You’re rarely going to get a big company, a Fortune 100 company who’s going to say, ‘you know what, to hell with it.’ It’s what you don’t see and you can’t quantify, but it’s really there, and that’s a difficult argument to make to people like Shay Assad because they’re only looking at the here and now, what costs are, and that’s his job, to hammer costs.” ■

Email: zbiggs@defensenews.com.

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