By Emelie Rutherford
The Pentagon’s effort to find $100 billion in savings through efficiencies includes actions intended to spur defense contractors to save the government money, such as adding incentive arrangements into contracts, a senior official said.
Pentagon acquisition chief Ashton Carter “in the coming months” will issue final guidance to implement the Defense Department’s new efficiencies initiative, Defense Procurement and Acquisition Policy Director Shay Assad told lawmakers last week.
This Pentagon initiative, which is distinct from acquisition-reform efforts, is intended to yield $100 billion in savings over five years, starting in fiscal year 2012 (Defense Daily, June 7).
In describing the new push toward greater efficiency, Assad told the Senate Budget Committee in writing on July 15, “While none of these emphasis areas are new per se, the difference now is a concerted push to adopt these practices across the (Defense) Department.”
“Specifically, there are a number of actions we can and must take to infuse incentive arrangements into our contracts and motivate industry to achieve greater efficiency,” he said. “We expect to reap the benefits of that efficiency as industry will share savings with the government.”
For example, the Pentagon is re-examining its method of computing objective profit and fee for contract negotiations–through calculations called “weighted guidelines”–to ensure it properly recognizes risks and rewards higher productivity with higher profits, Assad said.
“We need a system that enables us to incentivize contractors to innovate,” he said.
At the same time, he said, the Defense Department needs to “appropriately acknowledge” value contractors receive from improved cash flow. And it plans to challenge industry to reduce gaps between proposed and actual rates in forward-pricing agreements.
The Defense Department has found benefit in shying away from cost-plus-award-fee contracts, Assad said, because “we have found that objective incentive arrangements enable us to better align contractor profitability with outcomes in the form of contractor-delivered accomplishments.”
“We will restrict the use of pure award fee contracts to those situations where objective measures do not exist,” he said. “We will seek authority from the Congress to employ multi-year contracts when significant savings are possible. We are working to reduce the backlog of undefinitized contracts and re-emphasize the fact that we get a better deal when we prospectively price and negotiate our contracts as opposed to authorizing work and postponing agreement on price.”
The Pentagon wants system-development and procurement contracts that “require government and industry to share equally in overruns and underruns,” he said.
Assad emphasized the “unmatched value that is achieved when we leverage real competition,” and described actions to avoid program decisions that set the Pentagon on a path to buy goods or services from a single entity. Those include using open-systems architecture and technical data packages, to allow for later competition on weapon systems.
While he said the Pentagon “will examine each and every opportunity to open up a requirement for competition,” in reality “a significant proportion of defense spending will be allocated to follow-on acquisitions of existing weapon systems in a ‘sole source’ mode.”
Thus, he said, adjustments need to be made to account for actual realized costs that occurred under prior production lots. He said such a “searching examination” must be conducted of both prime and subcontractor contracts. Assad is leading the peer review of sole-source contract awards worth at least $1 billion and directing contracting officers to get actual cost histories from major suppliers before negotiations.
“This is an area that is particularly ripe to achieve a significant amount of savings that will translate to enhanced buying power for the (Defense) Department,” he said. “The government must do more to incentivize prime contractors to manage their subcontractors and reduce prime and subcontractor overhead costs.”
The Pentagon, meanwhile, is examining existing indefinite-quantity/indefinite delivery (IDIQ) contracts with companies to determine how much they “have yielded true competition for individual task or delivery orders amongst the contractors that hold these IDIQ contracts,” Assad said.
He described varied ways to eliminate inefficiencies in contracts, including curbing the “exorbitant costs we often pay contractors to prepare complex proposals for those systems we are acquiring on a sole-source basis.”
In addition to efficiencies that can be gleaned “by incentivizing and influencing” industry, Assad said, there are “a number” of practices Pentagon acquisition professionals must use to improve their efficiency. Those government efficiency improvements also will be covered in the guidance regarding improving efficiency that Carter will issue.