Congress to scrutinize DoD multi-year contracts under proposed rule

Congress will be able to keep a closer eye on the Defense Department’s multi-year contract procurement if a new proposed rule is adopted.

The proposed rule, which DoD issued on Dec. 30 in the Federal Register, requires the Defense Secretary to certify to Congress that certain conditions have been met before entering into a multi-year contract.

Those specifications include making sure payments to the contractor are not made before costs are incurred, and that the contract does not provide for a price adjustment based on the failure to award a follow-on contract.

The proposed rule also requires DoD to notify the congressional Defense committees at least 30 days before the termination of any multi-year contract.

The government uses multi-year contracts to purchase up to five years worth of goods in one contract. The government and contractor agree to a fixed price over the contract life, and the contract is funded annually. If the government cancels the contract, the contractor is still paid an agreed-upon portion of the costs.

“The purpose of a multi-year procurement is to reduce program cost growth and introduce stability into the acquisition process. In theory, it does so by making a commitment to the contractor to procure a specific quantity of a weapon system over several years to be funded on a year-by-year basis. The contractor is thus incentivized to realize savings,” the Defense Acquisition University’s Acquisition Encyclopedia states.

The additional oversight puts more pressure on DoD to make cost-saving and efficient decisions when entering into a multi-year contract.

The most recent report on DoD’s multi-year contracting came out in 2008 from the Government Accountability Office.

The report stated DoD spends about $10 billion annually on multi-year procurement, which can account for anywhere between 8 percent to 15 percent of the procurement budget. Congress ordered the report because it was concerned about the department’s management of the process and the savings realized by the contracts.

“DoD’s process for justifying multi-year programs leaves questions about the appropriateness of some approved [multi-year procurements] and the cost effectiveness of investments made for the risks assumed,” the report stated. “Although the law has clear requirements for stable, low-risk programs with realistic cost and savings estimates, lack of guidance and a rigorous process is not achieving this.”

The proposed rule change is in response to sections of the 2015 Defense authorization act and Defense appropriations act that address multi-year procurement.

In the proposed rule, DoD stated it doesn’t expect the change to have significant economic impact on small entities because it applied to multi-year contract authorities that deal with major acquisition programs that small entities would not have the infrastructure or capacity to fulfill or sustain.

Comments on the proposal are due by Feb. 29.

Congress has been trying to reform the defense acquisition process for the past few years. While the 2015 Defense authorization act made some changes to the acquisition process, the 2016 version makes significant changes.

The act gives military service chiefs and secretaries more power over the acquisition process than they have had in 30 years.

Along with changing authority power over acquisition programs, the bill attempts to streamline the acquisition process.

Acquisition reform “is tied to national security in a sense that 50 years ago from a technological superiority perspective we had 20 years … [before] our adversaries would catch up. In today’s day and age we just don’t have that, we have five years, so we have to do things faster,” a House Armed Services Committee staff member said in the fall.

Part of streamlining the process is reducing the paperwork burden for program managers by reducing reporting, documentation and certification requirements.

The authorization act also attempts to empower program managers by giving them more control over their programs.

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