Contracting reform tops list of Senate NDAA acquisition changes

After moving acquisition milestone authority to the services last year, the Senate Armed Services Committee now has contracting in its sights for reform in the 2017 defense authorization bill.

As the Defense Department continues to court traditionally nondefense companies, the Senate Armed Services Committee is trying to smooth contracting methods for them.

The committee’s version of the bill tried to wean DoD off of its reliance on cost contracts in favor of fixed price contracts.

“The whole culture of cost contracts cuts across everything. … Cost contracts are almost a drug,” said a committee staffer. “Really, what has happened over the course of decades is that the Department of Defense’s dependence on [cost contracts] has created some really, really negative incentives for the contractors and for the government.”

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The staffer said cost contracts have become an easy way out for both sides.

Reformers think cost contracts are also burdensome for both sides and cause non-defense companies to shy away from working with DoD.

That’s because cost contracts are rare in the private sector and involve companies making a line item charge for every part of a product.

Fixed cost contracts rely on a price point set in the commercial realm or through repeated government contracts. They are faster and can benefit the government since they call for a firm price for a product, even if material costs rise during the life of the contract.

To encourage fixed priced contracts, the Senate bill requires a penalty equal to 1 percent of the contract for using the cost method in a research and development contract. The penalty would be 2 percent for a procurement contract.

That provision would set in in 2018 and the fees would go to fund fixed price prototyping. The penalties would last for four years, the staffer said.

“By the end of four years, the expectation is that the culture should be changed in that particular time frame and whatever is left would be one of those things that actually should be cost contract appropriate,” the staffer said.

The bill also has a provision that requires senior officials to sign off on cost contracts more than $50 million. That will be phased down to $5 million by 2020.

The staffer said DoD isn’t completely getting rid of cost contracts. They will still be used for products specific to DoD that don’t have set price points.

Reforming the bid protest system

Another contracting procedure the committee tried to reform is the bid protest system.

The committee staffer said some “Wall Street” theorists think it is always in a company’s best interest to protest.

Bid protests have increased and have become a bigger burden on DoD and the Government Accountability Office, which adjudicates the protest decisions.

The bill requires companies that make $100 million in revenue to pay the protest bid costs to GAO.

The staffer said GAO has not yet said how much money that would save.

The bill would also address incumbent contractor protests. Those are protests from a contractor currently providing a service or product when a contract needs to be put out again for offers.

Companies often do this so DoD will have to continue buying from the incumbent company through what is called a bridge contract until the protest is resolved.

The bill would require the money in a bridge contract to be kept in an escrow account. That money would go either to the incumbent contractor, if it wins the protest, or to the company DoD decided to change to in the new contract.

Opening doors for innovation

The committee tried to open doors for innovation and risk-taking in procurement by completely reorganizing DoD’s acquisition structure.

The bill would completely do away with the undersecretary of defense for acquisition, technology and logistics, a position responsible for more than $160 billion in procurement and research funds.

Instead, the office would partly be absorbed by the undersecretary of defense for research and engineering (USD R&E).

USD R&E would be responsible for oversight of weapons development and focus on where the department is going in terms of technological goals and innovation.

Under USD R&E an acquisition policy position would be created. That position would be in charge of “setting defense-wide acquisition and industrial base policy and overseeing the development of weapons and national security systems by the military services,” said a May 12 committee press release.

A position created in a previous authorization act, the undersecretary of defense for management and support, would handle more of the everyday, business side of acquisition. The office would be a line office that helps run defense agencies that perform critical business operations.

In short, the bill frees the research and development parts of acquisition to focus on innovation, while the business management secretary makes sure the trains run on time.

“This USD R&E position builds upon and updates the old USD R&E, a once-powerful position that helped to lead the development of stealth, precision guided munitions, and other advanced capabilities as part of the so-called ‘Second Offset’ strategy during the Cold War,” the release stated.

Committee staffers said the change was a natural move after last year’s NDAA wrested some procurement authority from the acquisition office and gave it to the military service chiefs.

The new assistant secretary of acquisition policy would act as an overseer of the service’s R&D and procurement. The position would advise and assist and only engage when military services begin to go off the rails, a staffer said.

USD R&E is responsible for laying out the vision for the services to work toward. Other innovation agencies like the Defense Advanced Research Projects Agency and the Missile Defense Agency will report directly to USD R&E.

As for the current acquisition office, a committee staffer said, “No one should view this as a comment on the performance of [Undersecretary of Defense for Acquisition, Technology and Logistics Frank] Kendall. … He’s doing a good job as AT&L.”

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