DLA falling short of its own policy to use performance based contracts

A new study says the Defense Logistics Agency could benefit from performance-based logistics contracts, but there may be some legal barriers in the way.

CORRECTION: A previous version of this article incorrectly stated DLA’s use of  performance based logistics contracts. DLA awards performance based logistics contracts, however, the study stated it is missing out on about $1 billion worth of savings. Federal News Radio regrets the error.

The Defense Logistics Agency may be missing out on about $1 billion in savings through performance based logistics due to funding and contracting barriers when working with the military services.

A new study by the Center for Strategic and International Studies (CSIS) is pushing DLA to develop a coordinated approach with the military services and the Defense Department to make better the use of performance-based logistics to sustain weapons systems.

The Oct. 16 CSIS report states there are barriers to optimal execution of performance based logistics (PBL) contracts caused by confusion over the use of operations and maintenance appropriations and working capital funds.

“DLA’s own ‘DLA Approach’ [policy] to PBLs demonstrates an enhanced conception of the role that the agency can play in contracting, unifying redundant contracts under one centralized agreement,” the study states.

The study suggested DLA work with the Office of the Secretary of Defense to seek specific authorization from Congress for use of O&M and working capital funds to support PBL contracts that are broad in scope and have a duration longer than a year.

These types of contracts put an emphasis on performance instead of goods. In a traditional contract, if a product breaks down or needs maintenance, DoD will buy the needed parts from a company and then fix the product.

With this model, the more maintenance or repairs system needs, the more money a company will make from spare parts. There is no incentive to make a longer lasting product, except for one that will equal or outlast a competitor’s product.

The increased use of PBL contracts is a priority DoD’s acquisition reform policy, Better Buying Power. DoD even released a guidebook on PBL and regularly examines the status of PBLs. However, DLA PBLs have been largely absent from the review process, the study stated.

The study found PBLs within the military services over the past 14 years have increased from almost nothing to about $4 billion in contracts for the Navy and Air Force, and about $1.5 billion in contracts for the Army.

Performance-based logistics contracts outline outcome performance goals for programs and then provide incentives for meetings those goals, sometimes through the whole life-cycle.

“Every single system we have, has some role for industry,” said Lou Kratz, vice president and managing director of logistics and sustainment at Lockheed Martin during an Oct. 16 panel on the report. “So you can pay industry for failure and we’ll sell you all the parts you want, we’ll sell you all the engineering support you want, by the drink… or we can change the business environment and buy for success, buy the outcome that the warfighter wants.”

With PBLs, a company, for example, will get a reward for keeping a certain number of aircraft it sold to DoD operational at all times. It gives the company incentive to keep the aircraft in top shape.

“PBL works… PBL is a good idea. It’s not, however, a panacea it’s not going to work in all cases and it’s not going to work if you do it poorly and it’s not necessarily to say that the answer to every problem, at least in the U.S. context, is to turn everything over to the contractor as a PBL. Rather it’s a case of using contractors to augment and support the organic maintenance and sustainment infrastructure the department needs to own,” said Andrew Hunter, a senior fellow at CSIS and a former DoD official.

PBL works particularly well for sustainment because these costs can far exceed the actual costs of a program.

“Seventy percent of the life-cycle cost of a weapons system is, in fact, the sustainment of that weapons system… the vast majority of the cost lies there,” Hunter said.

Although PBL isn’t ideal for every contract, the study detailed areas where the services can use PBLs the best.

The study states that sole-source environments are ripe for PBLs because it creates competition in an uncompetitive environment.

“PBL contracts provide powerful incentives to vendors to provide the exact outcomes envisioned from a well-executed competition: reduced costs and improved performance,” the study states.

Poorly performing programs also can benefit because the lack of attachment to the status quo could give vendors more leeway to propose significant changes to improve availability and cut costs.

Highly complex programs can take advantage of PBLs because DoD is at a disadvantage in recruiting and retaining the skillsets needed to achieve the desired cost and performance sustainment, the study stated. This is especially significant in IT and software development domains.

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