The Pentagon wants to motivate industry to come in under cost and is going to increase its use of incentive type contracts, as well as boosting the amount of money a company can earn when it comes in under cost, the director of defense procurement and acquisition policy said Monday.

Claire Grady, Director of Defense Procurement and Acquisition Policy Photo: DoD
Claire Grady,

Director of Defense Procurement and Acquisition Policy
Photo: DoD

“Industry should be earning a fair profit when they are performing well, and we have no interest in driving profitability out of the defense market place,” Claire Grady said during a speech at the National Contract Management Association’s 2015 Government Contract Management Symposium.

In the past, the Defense Department has been over reliant on firm, fixed price (FFP) contracts in which a company assumes all risk, she said. Some of those contracts would be better structured as fixed priced incentive firm (FPIF) arrangements that allow companies to rake in more profit if they are more cost-efficient. Share lines that are normally split 50/50 between the government and industry could be altered to deals that give the vendor a bigger slice of the pie.

“We’re looking at share lines that are more favorable to industry, which would be more like a 20/80 to try to motivate,” she told journalists afterward. “If industry underruns an aggressive but achievable target, we want them to benefit from that. We want them to be motivated to perform even better.”

Grady couldn’t point to any specific prospective contract where those more-favorable share lines could be implemented. “I think you’ll see that in most of the contracts we’re negotiating now,” she said.

As DPAP, Grady is the principal adviser to the Pentagon’s chief weapon’s buyer Frank Kendall on acquisition and procurement strategies. The Better Buying Power 3.0 initiative spearheaded by Kendall stresses the importance of increasing the use of incentive type contracts where it makes sense, but Grady wants to further emphasize the “thought process” behind FPIF contacts. The Pentagon is set to release guidance within a week on when to use incentive type contracts, setting target costs and how to structure arrangements to reflect potential risks, she said, adding that the document is on her desk awaiting signature.

“It’s not a formula. It is a business arrangement for sharing risk, and unfortunately I think there are some people who understand the formula and do the math…but do we really understand why a deal should be structured in a particular way?” she said.

The department wants to avoid paint-by-numbers type of contracting where all FFP contracts are changed to a FPIF model, and thus has no plans to codify these changes in policy, she said.  

“What might be an appropriate profit in a particular circumstance may be completely inappropriate in another,” she said. “It’s all a factor of the total deal. So what we’re really focusing on is not so much a change in policy but a change in critical thinking and strategic thinking of how you structure that deal.”

However, any FFP contract where vendor profits lie outside plus or minus four percent range might have excess risk and may be better served by a FPIF, she noted.

The department is also conducting its final review of new rules for services contracting, DODI Instruction for the Acquisition of Services, she said. “It’s imminent. It’s within a few months, a few weeks.”

The new rules emphasize the commander’s requirements and communicating them to industry, she said.