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The Defense Department is undergoing its first contract finance study in decades, looking at the fiscal health of the defense industrial base and how the Pentagon’s policies are working with private partners.

The COVID-19 pandemic posed serious questions about the ability of the defense industrial base to work in a constrained environment. Janice Muskopf, DoD Director of Price, Cost and Finance says the report is a much-needed snapshot of how companies are handling cash flow issues, and it shows which Pentagon guidelines are working best with industry partners.

“The study is a conglomeration of a whole bunch of different things, like looking at our policies, which are the best in terms of how they are working,” Muskopf said at the 2021 Government Contract Pricing Summit. “The one thing that’s important to mention is there’s no predetermined outcome. From my particular perspective, as far as where we’re going with this, I designed it to look at all these different things that I think are relevant.”

George Mason University’s Center for Government Contracting announced on June 22 that it is conducting some of the research involved in the study.

“GMU will examine free cash flow in the defense sector, the impact of cash flow by contract type and financing, financing and its impact on small businesses, and government accounting system requirements as a barrier to the commercial sector’s willingness to do business with the federal government,” GMU said in a statement.

Muskopf has been pushing a strategy within DoD’s acquisition office which she calls “striking the balance.”

“A firm-fixed-price contract is a single data point and depending on what perspective you want to take on, it could be a win or lose once the numbers go outside the negotiated value,” she said. “So firm-fixed-price incentive contracts are maybe a way to look at striking the balance between different positions and opening up a range of outcomes versus one single outcome. We’ve been doing a lot of training in this area. Every time we do this, we try to think about this concept of ‘how are we striking the balance?’ We’ve got more to come in that particular area. I think that’s just fundamentally an important concept for the workforce to understand.”

Muskopf hopes that DoD and industry can find a place where pricing can be a win-win situation, rather than taking an adversarial role.

One way Muskopf is achieving this is by allowing her workforce to take on some risk and by not micromanaging decisions. She is training her staff on risk mitigation so they are prepared to take calculated risks to strike a balance in pricing.

“Leadership plays a very important role in this particular area, in terms of challenging the workforce,” Muskopf said. “We need to support them so that when contracting officers are taking on these risks, they’re comfortable that they’ve got their leadership backing them up. I believe our contracting officers, as part of their basic role, are to exercise judgment. When people exercise reasonable judgment and they’ve got their leadership on board with them, they really don’t have anything to fear.”

Another way Muskopf is trying to strike a balance is through the Section 890 pilot. The pilot gives companies a break on the Truth in Negotiations Act (TINA).

“TINA has always been an all or nothing proposition, right? It’s one extreme or the other. A company either has to provide all factual data and certify to it or they get a TINA exception,” she said.

The Section 890 pilot allows commercial producers to keep some data to themselves and therefore lessen some of the work it takes to get on contract.

“One of the things that I’m doing is I’m coaching the contracting officers in terms of having dialogues with industry upfront before they go and embark on the pilot itself,” Muskopf said. “They know that I am here, I’m with them, and I’ve approved this. I’m with them through the whole thing. We’re going to look at how it turns out together.”

A full recording of the Government Contract Pricing Summit interview with Muskopf can be viewed on-demand at gcpsummit.com.

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