Pentagon to Revise Rules for Contracting Private Sector Services

By Sandra I. Erwin

The Defense Department is about to introduce a new policy that would bring greater scrutiny to contractor-provided services.

With the Pentagon now spending more than $150 billion a year on private-sector services, there is growing pressure to professionalize the process of hiring contractors and negotiating deals, said Claire Grady, director of defense procurement and acquisition policy.

Grady is a former deputy assistant commandant for acquisition and director of acquisition services for the U.S. Coast Guard, and has taken on a major role at the Pentagon at a time when the department is pushing wide-ranging procurement reforms and coming under growing criticism from industry groups for its business-unfriendly policies.

The Pentagon’s new approach to the procurement of contractor services will be detailed in the upcoming “DoD Instruction” The directive has been under review for more than a year and has yet to get final approval. A key theme in this policy is the expectation that any department official who hires contractors for any type of work should receive training on how to write requirements and negotiate terms such as how to reward contractor performance.

“We are looking to improve the tradecraft in services acquisition,” Grady said last week at the National Contract Management Association’s annual symposium in Washington, D.C.

The pressure on the Defense Department to tighten up its contractor hiring practices has been building up for years as the Pentagon increased its reliance on contractors for everything from construction work to secret-level research and development of technology.

“It’s different than it was 20 or 25 years ago when I started, when services were a smaller percentage of our expense,” Grady said. “Contractors are an essential element of what we do. And we haven’t always paid attention to services acquisition as we have on major weapons systems.” Services now account for 55 percent of all contract spending.

As service contracting became more widespread, the Pentagon’s highly centralized procurement command structure lost control, and over time it became clear that officials who had little or no experience or training in government procurement were making contractor-hiring decisions. Over the past several years, Pentagon procurement chief Frank Kendall has made services acquisition a higher priority on his reform agenda. The new directive would codify the message that Kendall has been communicating in his “better buying power” guidelines.

Grady said the forthcoming policy emphasizes the need to hold contractors accountable but also is mindful of concerns about excessive bureaucracy. “You don’t want to impose the same discipline on services as you do on major weapon systems but you have to have a balance.” Any service contract above $1 billion will have to be approved by senior acquisition executives.

The directive to make services acquisition training available across the Defense Department is significant, said Grady. Courses will be offered by the Defense Acquisition University in classrooms and online. There could be other vehicles for those who cannot attend DAU classes.

One of the Pentagon’s growing challenges is figuring out how to write contracts for private-sector support in so-called “knowledge based services.” Whereas it is easier to define duties and determine prices for commercial services like mowing the lawns or staffing commissaries at military bases, the knowledge-based category is of greater concern to the Defense Department.

Knowledge based services are tasks that require specialized technical expertise. They range from furnishing professional advice to management consulting and engineering support. The result of these services — which may take the form of information, advice, opinions, alternatives, analysis, evaluations, recommendations and overall support of day-to-day agency operations — are more difficult to articulate in contracts and assess a fair price.

Knowledge based services now consume 21 percent of all Defense Department services contracts. It’s “huge,” Grady said. The second biggest category is research and development, with 17 percent, and construction services at 8 percent.

The Pentagon’s track record in services contracting has been fraught with embarrassments in areas like overseas battlefield support, information technology and logistics systems. Billions of dollars in wasteful spending have been attributed to poorly defined work scopes and a lack of understanding of the marketplace by government officials.

“We need to make sure they do market research, get the requirements right and incentivize outcomes,” Grady said. Many government workers who hire contractors are “people who are not part of the traditional acquisition workforce,” she said. “I want to help people write requirements [without] trying to not be too prescriptive.” Whoever signs a contract must understand the needs of the “end user,” Grady said. “The emphasis should be on the commander’s requirements.”

Congress approved funds for the training initiative in the 2016 National Defense Authorization Act. Nevertheless, this will be “challenging,” she said. “How do we get training for people that are not part of our acquisition workforce?” Just figuring out who should receive training will be difficult. “These folks are not sitting in a program manager billet, or a contracting officer billet. But we still need to get them trained.”

Learning how to contract for services is quite different than buying weapon systems, which traditionally has been the focus of acquisition training. With services, Grady said, there is a “strong emphasis on getting the requirements laid out upfront.”

In her NCMA speech, Grady also addressed the chorus of criticism by industry groups and contractor executives that the Defense Department is squeezing vendors’ profit margins and wiping out incentives for the private sector to invest in innovative products.

The Pentagon is trying to do better on that front, Grady said. “We are committed to a robust industrial base,” she said. “Industry should be earning a fair profit when they’re performing well.” But while the Pentagon is not deliberately targeting profits, she warned, “We want to do everything we can to align the motivation of industry so we get the outcomes we are looking for.” Her office is promoting the use of “heavier incentives” by procurement officials to reward performance.

A case in point is a new truck procurement for the Army and Marine Corps, the joint light tactical vehicle, or JLTV.The program is now in the spotlight because the losing bidder, Lockheed Martin Corp., is suing the government for inappropriate handling of program data during a protest.

Grady did not comment on the protest. But she cited JLTV as an example of how the Pentagon intends to reward contractors for innovation.

“In source selections we are looking for opportunities to communicate more accurately to industry what’s important to our end users. And what will differentiate a product or differentiate a service that we’re willing to pay a premium for,” she said. “We don’t want to make industry guess. We want to communicate what it is that we would place value on.”

In JLTV, the government stated upfront the premiums it would pay for certain features. “You don’t have to guess if it’s worth $1 or $100 to us. We’ll tell you upfront in the source selection,” she said.

“That’s a change in the thought process.” For this to work, the industry has to know what the government is willing to pay, so “they know whether they want to spend the additional effort to get that outcome.”

Topics: Business Trends, Service Contracts, Procurement, Acquisition Reform

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