Under new policy, DoD to reimagine cost, pricing data requirements for contractors

The Defense Department wants the contracting community to embrace a new policy that could upend the annual procurement cycle for major weapons systems.

In effort to reduce the time it takes procure major weapons systems, the Pentagon says it wants to change the way both the department and industry think about cost and pricing data.

Under a new policy the Pentagon is planning to release in the coming days, defense contracting officers will negotiate options for a two-year follow-on contract using the same cost and pricing data that the department and industry first used to develop an initial proposal for the first year of the contract, said Shay Assad, director of defense pricing and defense procurement and acquisition policy.

Specifically, DoD’s policy will apply to the Pentagon’s procurement of sole-source military items.

“This is a huge sea change for us,” Assad said Wednesday morning at the Government Contract Pricing Summit in Rockville, Maryland. “We’re telling our contracting officers, ‘Look, we want you to expand your horizons.’ … There’s an element of risk to this, both for the companies involved as well as the government. We’re going to take that single year data and we’re now going to … price two years out with that data. That means that we both have to feel comfortable that what’s being forecasted in where we’re going to end up.”

Assad had hinted at DoD’s planned changes last month. The most recent policy update is part of the Pentagon’s goal of reducing the overall lead time for major procurements in half.

Ellen Lord, DoD’s undersecretary for acquisition, technology and logistics, has previously told Congress the department wanted more flexibility in how much data it required from its contractors.

“We’re going to get into a battle rhythm on major weapons systems and major procurements of doing these once every three years,” Assad said of the new policy. “We’re going to get out of the annual procurement cycle that we find ourselves in continuously.”

Specifically, Assad wants defense contracting community to work together to move away from a standard cost and data pricing definition.

Ideally, Assad said he envisions a scenario where contracting officers and vendors come to an agreement up front, sign an agreement for the first year of the contract and settle on the cost and pricing data for the second and third years together.

In the future, Assad envisions contracting officers would simply receive approval on contracts below $50 million from the next level up. Contracts over $50 million would receive approval from the service’s chief of the contracting office.

This approach will help defense contractors reduce the time it takes to submit their proposals to roughly 60 days, Assad said.

“We want to redefine that data set,” he said. “The reality is companies, for significant proposals [of] $50 million and above, they just cannot meet that 60-day time frame with the definition of cost and pricing data as we currently have it. We actually want to rely on contracting officers and pricing professionals to think, to use their judgment.”

Assad, however, acknowledged that much of the Pentagon’s new policy will depend on Congress.

The Senate included a provision in its version of the defense authorization act, which the chamber passed earlier this week. The provision authorizes the defense secretary — through a pilot program — to explore alternative ways the department can transform its contracting and pricing processes associated with major weapons acquisitions.

Assad said he hopes the Senate’s provision makes the final version of the annual defense policy bill. If it does, DoD can truly enact Assad’s new policy. And if the Pentagon can achieve success under these pilot programs, greater changes to the Federal Acquisition Regulation may be in store.

“Our intention is absolutely to change the statutory definition, or to request Congress to change it, if in fact the pilots that we’re hopeful they’ll enable us to do, are successful,” Assad said.

Simply increasing the maximum level under the Truth in Negotiations Act won’t spark enough noticeable change, Assad said.

Congress has in recent years made changes to the Truth in Negotiations Act, which requires contractors to submit certified data about their underlying costs and prices for most acquisitions worth more than $2 million. The law was designed to help the government assess whether it’s getting a good deal.

In last year’s National Defense Authorization Act, lawmakers increased the threshold for procurements that require certified cost and pricing data from $750,000 to $2 million, and also gave DoD the discretion to waive the data requirements altogether on foreign military sales contracts if it believes it already has enough information to conclude that prices are fair and reasonable.

But Assad said those kinds of changes haven’t done enough to whittle down the Pentagon’s lead time on major acquisitions.

“What we’re not interested in doing is changing 400-500 days that it takes to do something to 475 days,” he said. “What we really want to get to is changing 400-500 days to 30.”

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