Pentagon to Ease Off on Fixed-Price Contracting Demands

By Stew Magnuson
The Defense Department will be easing off on demands that program managers enter into fixed-price contracts with vendors, a senior Pentagon official said Sept. 19 on Capitol Hill.
Frank Kendall, undersecretary of defense for acquisition, technology and logistics, gave a preview of the Better Buying Power 2.0 document during an Aerospace Industries Association sponsored speech. The first version, which was released in September 2010, had 23 initiatives designed to streamline the military’s wasteful and time-consuming acquisition processes.
The first iteration of Better Buying Power emphasized fixed-price contracts over cost-plus contracts, in which a contractor is reimbursed for overruns. Fixed-price contracts, on the other hand, hold vendors to one price, and any unanticipated expenses must be absorbed by them, not the military customer.
“What happened was a bit of an overreaction,” Kendall said. “We want them [military customers] to use the right kind of contract for whatever they are doing.”
Better Buying Power 2.0 is going to “recalibrate” the fixed-cost versus cost-plus contracting demands, he said.
Fixed-price contracting has proven unpopular with contractors, particularly those that are working on programs with advanced, or unproven, technologies. It is hard to predict what the final price tag will be when submitting bids.  Some have suggested using hybrid contracts, where certain parts of a program that are deemed risky are cost plus, while other parts with proven technologies are fixed price.
Kendall’s office is currently circulating the 2.0 version of the initiative to contractors and other stakeholders for their input ahead of its public release. He did not say when the final version would be published.
“We have dropped a few things off the list because we have gotten as far as we need to,” he said. It will also have a few new items.
It will continue to require affordability, he said. The problem in the acquisition community is that programs end up being canceled because the services find out late in the game that they don’t have the funds to buy what they developed. “We should have realized that we couldn’t have afforded them earlier.”
The Marine Corps’ Expeditionary Fighting Vehicle was a prime example, he said. It took 10 years of development only to discover that if the Corps bought them, it would not have any money left over to purchase any other vehicles.
Another initiative from the first iteration is “should cost” analysis of programs.
“Should cost is here to stay,” Kendall said. Program managers should not be penalized for not spending all the money allocated to them, he said. All too often, leftover money the following fiscal year is taken away from them. They need to do their own analysis of what a program “should cost,” he said.
Caps on programs will require the services to trade off on requirements in order to keep costs down. “That is something that they traditionally have not been prepared to do,” he added.
The new document will also emphasize the professionalization of the acquisition workforce. There has been an influx of new contracting specialists during the last two years, and they need further training and education, he said.
“Acquisition is hard. … It is a very complicated business,” he said. There will be a wave of retirements, and the Better Buying Power 2.0 will seek ways to transfer knowledge from the older to the younger generation, he added.
Another new item will be higher expectations of the service chiefs.
“I would like to see them take a more active role in acquisition, particularly in regards to requirements,” Kendall said. They can ensure their program managers make the necessary tradeoffs in order to keep costs down, he said. They need to make sure requirements are realistic and technologies are mature enough to move forward.
“That is one area where they can be very, very helpful,” Kendall said.
Photo Credit: iStockphoto

Topics: Business Trends, Doing Business with the Government, Defense Contracting, Defense Department, Civilian Workforce

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